Spokane Journal of Business

Don't overlook oft-forgotten retirement expenses

Cost of living, taxes are bound to rise; health care costs can grow quickly

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In talking with people about retirement, I've found a few areas that tend to be regularly overlooked. The reasons for that range from simply not having thought of them to not having any plan for how things change once you're actually retired.

Here are a few of the more important points you may want to consider in creating or monitoring your financial strategy.

Health care: Everyone is aware of this one. However, the challenge lies in actually understanding the length of time they're likely to live in retirement and the cost of care beyond what Medicare will provide.

Fidelity Investments says it has been tracking these costs since 2002. For 2012, the most current year for which the company has data, it's anticipated that a couple retiring then at age 65 is estimated to need $240,000 to cover their medical expenses throughout their retirement.

Since 2002, this number has gone up by 6 percent annually. This number also assumes they have no employer-provided health care coverage and that they do have access to Parts A and B of Medicare, as well as some help from Part D for medications. It doesn't include any costs for nursing home or long-term care.

Further, medical inflation is growing faster than salary increases and cost-of-living adjustments for many people. Since this study started in 2002, Social Security has provided an average cost-of-living adjustment of 2.3 percent against an assumed average annual increase of health care costs for retirees nationally of 6 percent.

Additionally, the Social Security Administration determined that those 65-year-old couples who retired last year with a $75,000 joint household income should expect that 35 percent of their annual benefit, about $10,476, would be needed for medical expenses today. By 2027, those costs will require as much as 61 percent of their annual Social Security income, or about $25,000 a year.

Living expenses: Even if your home is paid for, expenses for maintenance and repairs must be considered. Also, let's not forget property taxes and utility costs rising over time. And, since you've likely been eating most of your life, you'll probably want to continue and need to include some consideration for food-cost increases.

Own a car? Going to drive it for 20 or more years? Even if you did, you should still factor in upkeep and gas. Realistically, maybe even a replacement vehicle or two.

How about insurance on your property and vehicles? Those costs will be sure to rise as well.

And, unless a monastery is your choice for retirement accommodations, you may want to factor in something for the ever-popular travel and entertainment. These don't have to be either lengthy or elaborate but you do have to plan for them.

Consumer debt: Paying down credit card bills is important while you're working so that your overall debt load in retirement is minimized. There is no benefit in carrying these, as they just eat into your available cash flow for important things.

Also, have some lifeboat money set aside. I'm not talking about cash for a big yacht or even a normal fishing boat, though feel free to do so if you can. This is the emergency fund, the money you want on hand for unexpected expenses so that you don't have to tap into your other assets and potentially mess up your overall long-term plan.

This is largely a personal comfort-level number. It's suggested that you have at least three months—and up to a year—of gross living expenses invested in a readily accessible account. Consider both pre- and post-retirement expenses to decide the amounts.

Inflation: Saved the worst for last. This is the invisible monster, the hidden tax that many don't consider. A 2011 study by the Society of Actuaries found that 72 percent of pre-retirees and 55 percent of those already retired actually calculate the effect of inflation. Worse yet, the study showed that only 5 percent of pre-retirees have an investment strategy extending to, or beyond, their life expectancies.

I checked with the fine folks at the Bureau of Labor Statistics, the ones who calculate and track the Consumer Price Index. This is the number used to track inflation at our level. I wanted to go back 30 years to 1983 to figure out the average rate of inflation over that time. I think that would represent an adequate space of time for a retirement. While the individual average rates ranged from a high of 5.39 percent in 1990 to a low of negative 0.34 percent in 2009, the overall average was 3 percent, which is pretty much the U.S. average for even longer periods.

So, you say, what's the point?

The point is simply that, if you had just wanted to maintain your buying power during the past 30 years, the pool of assets you live on would have had to appreciate at a total return rate of at least 3 percent, because in all likelihood, the amount you'd need to withdraw would increase that much each year.

Let's confuse the issue further and assume that yes, you'll be taxed on your asset withdrawals. While common sense suggests otherwise, let's also assume that your tax rate would actually remain at 28 percent. (I suggest that you also should do well in your planning to presume that taxes will increase somewhat over your retirement and, thus, reduce the amount of money you'll actually have to live on.)

Therefore, allowing for taxes and inflation at these rates, your assets shall have to earn 4 percent as a bare minimum, just to maintain your buying power. If not, you'll be forced to pull out principal. This then has a downward spiral effect in that you'll have less of a base upon which to earn any return. Not good.

The real dilemma is for those people who are on a fixed pension and/or with assets primarily in fixed-income bond and bond-like investments. You can readily see that in today's low-rate world, just on the basis of math, you're already likely falling behind in terms of being able to maintain your lifestyle. Even when interest rates rise, it's probable that inflation can rise as well, minimizing the benefit of the higher nominal rates.

If you haveless than five years until retirement, itwould do you well to sit down and do a steely-eyed calculation ofyour expected income needs and start now to create a strategy to help ensure your savings will last.

For those who are retired now, a review of income and expenses is still in order with an eye toward how—in accordance with your needs, assets and comfort level—you can perhaps improve your asset allocation mix, control expenses, and, ultimately, live how you want for as long as you can.

  • Michael Maehl

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