Setting Realistic Goals for 21st Century Retirement

Rising Prices

Finally, even among retirees who religiously track their spending, disproportionately rising prices and unpredictable expenses can significantly increase the cost of retirement. These increases are particularly burdensome for those who require extensive medical care. “With healthcare costs we’ve seen an annual increase of 12 percent per year on the hospital side,” said Carrozza. “Even though most retirees will have Medicare and supplements, out-of-pocket costs still go up every year.”

Long-term care in one form or another is also a likely prospect for most retirees, though many hesitate to spend money on LTC insurance. “It’s the elephant in the room,” said Carrozza. “Today’s retirees and pre-retirees absolutely need to inform themselves about long-term care insurance, both traditional and hybrid.”

Aside from healthcare and health-related expenses, the prices of goods and services most important to seniors may be outpacing investment returns and Social Security adjustments. Social Security’s cost of living adjustment is currently based on the CPI-W, which accounts for items wage earners – not retirees – most often buy. “Inflation statistics don’t factor in the items seniors care about, and real costs are outstripping most retirees’ portfolios,” said Carrozza.

Planning Ahead

Fortunately, there are plenty of steps clients can take to save money, avoid unnecessary expenses and maintain comfortable lifestyles, particularly if they’re still working or have only recently retired. For many, proper planning begins with an honest assessment of current expenses. “Look at the last 12 months of what clients have actually spent before looking at income,” said Lee. Because long-term changes in spending habits can be so difficult – and because pre-retirees may be willing to work longer to provide for more expensive lifestyles in retirement – higher-than-expected costs lead many to work longer, pay down debts and grow investments. For clients already approaching set retirement dates, Lee similarly recommends that they track their total expenses six months in advance, and that they establish solid spending habits by remaining under those numbers for the first six months of retirement.

Clients who begin planning early enough might also be able to avoid reliance on savings and non-guaranteed sources of income. “Fill your baseline needs with guaranteed income,” said Grainger. “Create a ‘retirement paycheck’ with components like Social Security and pensions.” Lee likewise noted that the “safety percentage” for stock investments hovers under four percent, and that many clients still unsafely assume they’ll be able to count on returns of up to ten percent.

In facing the likely costs of long-term care, retirees can choose from a variety of LTC insurance products that don’t require them to risk “wasting” their money on policies they may not use. Many hybrid plans allow death benefits to be used towards long-term care if necessary, and older plans may be able to be converted into new ones that include the same provision.

When it comes to the uncertainty of healthcare costs, price increases and other unknowns, many advisors also recommend setting aside a little extra – even if that means downsizing or working a little longer. “The best thing you can do is to go into retirement with a little more than the plan says you need,” said Lee. Medicare means-testing may change, private insurance premiums may rise, and although some legislators are attempting to tilt the cost of living adjustment calculation in seniors’ favor, prices may continue to outstrip Social Security increases.

Ultimately, the best thing a client of any age can do is to consult with an advisor as soon as possible regarding their likely expenses and income in retirement. “If you’re not saving for retirement, then you’re not living within your means,” said Grainger. “The sooner you can take the time to plan and be honest about what your lifestyle is costing, the better chance you’ll have at maintaining that lifestyle in retirement.”