People underestimate what their costs of living in retirement will be in three critical ways:
1. Assuming you’ll spend less in retirement than while working: “The majority of people have never really sat down and calculated what they’ll need every month,” Pamela says. “You need to be comprehensive in listing out all expenses.” List everything you might spend in retirement, including expenses such as travel, hobbies and spending on grandkids. Don’t forget assigning numbers for major but often unexpected costs such as car repair, helping out a child financially or major home repairs.
2. Underestimating the impact of inflation: “We’ve been the beneficiaries of historically low inflation rates in recent years. It’s easy to forget that inflation has been a lot higher over the years – in some years it’s been 10% a year and even higher. But even low rates of inflation eat away at the value of your savings.” If inflation averages just 3% per year, it will swallow more than $117,000 of the average Social Security benefit over 20 years, according to the LIMRA Secure Retirement Institute. “Inflation averaged 3.22 percent a year from 1913 to 2013, so factor in at least 3% inflation per year – 4% if you want to be on the safe side,” Pamela says.
3: Underestimating health care expenses. “Out-of-pocket medical expenses in retirement is an area where many people are significantly underestimating their costs,” Pamela says. A 65-year-old couple retiring now will need $275,000 to cover out-of-pocket health care costs, according to a study by Fidelity, and that does not include nursing home or home health care. At least 70% of people over age 65 will require long-term care services, and more than 40% will need nursing home care, according to the U.S. Department of Health and Human Services. The typical nursing home stay costs more than $250,000, and Medicare does not cover these expenses.
Pamela shares steps people can take to make up a retirement savings shortfall, including:
1. Increase the amount you save each year by at least 1 to 2 percent. “You won’t feel the pinch, but you’ll be surprised by how much your savings will grow.”
2. When calculating how much you’ll need in retirement,, and assume you’ll live to at least age 95.
3. Save more where your money is guaranteed to grow every single year, even when the market is crashing. Pamela advocatesthat’s never had a losing year in more than 160 years. She also shares details of a “Bank On Yourself for Seniors Plan” for people over 60 that comes with a long-term care benefit and covers home health care for up to three years.