In the St Louis Post Dispatch article “Gallagher: Can You Afford to Retire?” Jim Gallagher discusses a recent report by the Government Accountability Office (GAO) that estimated how much of your pre-retirement income one would need for retirement spending. I shared my experience with helping pre-retirees plan for retirement and how surprised people are by how expensive healthcare can be in retirement. Especially when you look at the impact that inflation has on it over time. I also shared the figures I used when planning for retirees who do not have employer provided retiree healthcare.
Healthcare expenses are a significant portion of retirement spending and can prevent people from being on track for their retirement goals. In order to get on track you usually have to make adjustments such as;
1) increase the amount you are saving toward retirement, or
2) consider a later retirement age, or
3) spending less on other financial goals in retirement
or some combination of those three variables in order to reach your most important financial goals in retirement.
Jim also included information that I shared with him about the most common mistake I see when potential clients come in and would like me to double check their math to see if they can afford to retire. It is that they have added up their sources of income such as portfolio, Social Security, pension, etc. and compared it to their expected expenses their first year of retirement and since the two numbers (income verses expenses) finally match up they think they can afford to retire. I know that that is a dangerous assumption because I have run so many financial plans and I have a lot of experience seeing the impact of inflation therefore I know that in a few years the income sources will not be covering the expenses due to the different inflation assumptions for income sources versus expense items. For example Social Security income we assume will inflate at 2% while healthcare expenses we assume inflate at 6%. The better course of action is to run a Monte Carlo analysis to determine if your money will last a lifetime and if not what changes to the three variables listed above would need to be made.
Some clients that initially hire me discover that they are already on track to make all of their retirement needs, wants, and wishes come true. But for most folks, we must create a plan with action steps to get there. I have noticed that some people who thought they were on track were not, and some people who thought they were not, were. Give yourself enough years before you would like to retire so that you can create the retirement for yourself that you deserve. Especially considering what you now know about healthcare expenses and inflation!