Given rising healthcare costs, longer lifespans and the growing need for family assistance among both millennial children and elderly parents, retirement is only becoming more costly. However, many early and pre-retirees maintain unrealistic expectations regarding the lifestyles they’ll be able to maintain.
“So many clients have just avoided planning altogether and have nonchalant attitudes that everything will work out,” said Angie M. Granger, President and CEO of Black Belt Financial and Insurance Services. “People aren’t aware how much their lifestyles are costing them.”
Still, senior clients want to enjoy retirement, and most are reluctant to significantly change the ways they live once they stop working. With less income and more time on their hands, poor financial planning can lead long-lived clients to run out of money far before their retirements are through. To help recent and soon-to-be retirees find a sustainable balance between enjoyment and saving, advisors need to help these clients understand their current expenses, future expenses and the abilities of their portfolios to cover both.
The Day-to-day Costs of Retirement
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Even among clients who’ve monitored their expenses throughout their working lives, many have unrealistic expectations of how much they’ll spend in retirement. “The historical mindset has been that we spend less in our retirement years, but the reality from my perspective is that people end up spending the same, if not more,” said Ann Margaret Carrozza, New York-based state and elder law attorney. Early retirees often spend extra on travel, more active social lives and gifts for grandchildren, while older seniors usually face far higher medical bills.
Unaccounted-for expenses also chip away at many retirees’ portfolios. Costs such as rent, mortgages, car payments and insurance are easy to track, but even experienced savers may drastically underestimate how much they spend on fuel, food and other month-to-month variables. Coffee shop coffees, take-out and myriad other convenience items also become far bigger burdens on a fixed income. “It’s very tough to go from $120,000 per year to having to live on $5,000 or $6,000 per month, even though that’s not a small income,” said Karen Lee, CFP at Karen Lee and Associates. “It’s very hard for people to change spending habits at that age.”
Aside from ongoing pre-retirement expenses, the additional free time retirees enjoy presents far more opportunities to spend. “Clients often have the wrong idea of what it’s going to mean to have more free time on their hands, and what that’s actually going to cost,” said Angie Grainger, President and CEO of Black Belt Financial and Insurance Services. “If your life isn’t designed in a way that gives you fulfillment, you’re going to end up spending even more.” Shopping and dining trips, extra vacations and impulse buys become far more common for some clients, particularly those who are single or socially isolated.
Another increasingly common cost among early retirees is financial assistance for adult children. Millennials are still facing a tough job market, and according to Carrozza, roughly 48 percent of all Baby Boomers and older adults are helping their children with housing, loans or other bills.
In fact, retirees are taking on a dramatically rising proportion of student loan debt, typically after co-signing their children and grandchildren’s loans. According to the Government Accountability Office, student debt among seniors 65 and older grew from $2.8 billion in 2005 to $18.2 billion in 2013 and now accounts for over 15 percent of the total burden nationwide.
At the same time, longer lifespans and steep medical bills have lead many of the nation’s most elderly to depend on their retired and soon-to-be retired children for help. A Pew study found that roughly one in seven adults in this “sandwich generation” is financially assisting both an aging parent and adult child.