“Retirement” – it’s a term we’ve redefined over the years.
This phase of life differs significantly from what our grandparents experienced.
For most of us, retirement will be a time when we shift from working to living life.
Home improvement projects you’ve put off because of working long hours can now be tackled.
Trips you wanted to take but couldn’t because of work demands can now be taken.
That career you really wanted to pursue but didn’t because you needed a steady income can now be pursued.
Seeing your grandkids more is now feasible because you don’t have to work.
Volunteering for an organization you feel passionate about is now possible.
Retirement allows us to maximize our life … as long as we can afford it.
Looking at the longevity in your family history is a good indicator of how long you could live.
While genetics is part of the equation, improvements in health care and living a healthy lifestyle are other factors to consider.
From your family history, you may find you could live 20+ years in retirement.
That’s a long time!
When planning for retirement, segment it into three stages: active, moderately active, and nonactive.
Another way to address these stages are the “go-go” years, the “slow-go” years, and the “no-go” years.
To ensure you’re saving enough money for retirement, estimate how much you will need.
Segment expenses into these four areas: annual spending, major repairs/replacements, health care, and long-term care.
1- Annual spending
How much do you spend annually? If you’re unsure, calculating whether you’re saving enough money for retirement will be challenging.
Once you know how much you spend annually, then adjust that amount to include new activities during your active retirement years.
Most retirees tend to spend more money in their active retirement years on new hobbies and travel than they did while working full-time.
2- Major repairs/replacements
During retirement, you may have large one-off expenses for major repairs or replacements. For example, you may need a new car.
If you plan to live in your home as long as possible, you may need to replace your roof or water heater. Your appliances may also need to be replaced during your retirement years.
If your mobility changes, you may need to relocate your primary bedroom to the main level or install a chair lift to assist with going up stairs.
Creating a property maintenance schedule for your home will help you identify the timeframe and estimated cost for each major home repair or replacement.
3- Health care expenses
At age 65, you will be eligible for Medicare; however, it only covers 50-60% of estimated health care expenses.
Also, there are income thresholds for Medicare Part B and Part D, resulting in a surcharge that increases premiums for those with higher incomes.
According to a Fidelity Investments 2024 Retirement Health Care study, the average annual cost of health care in retirement is approximately $6,425.
Depending on your lifestyle and genetics, this cost may be higher or lower.
If you retire before age 65, you’ll need to explore health care insurance options to bridge the period before you are eligible for Medicare.
4- Long-term care expenses
Long-term care (LTC) is not covered by Medicare and becomes necessary as we live longer.
LTC includes home care, adult day care, and nursing home care.
It’s estimated that 70 percent of people age 65 and older will need some long-term care at some point.
When care is needed, the average length of time is 2.5 years for men and 3.7 years for women.
LTC expenses average $127,750 per year, according to a Genworth Financial LTC Cost research report.
Costs vary depending on the quality of the facility and where you live.
There are many unknowns when planning for 20+ years in retirement.
Segmenting your retirement years into three stages (active, moderately active, and nonactive) simplifies planning for this part of life.
As you move into your later years in retirement, money previously spent on entertainment and travel will shift to cover your health care and long-term care expenses.
To ensure you can afford your retirement lifestyle, start the planning process early enough to allow time to adjust your saving strategy and expectations.
(Update to original post from January 14, 2020)
ABOUT THE AUTHOR:
Niv Persaud, CFP®, CDFA®, RICP®, is a Managing Director at Transition Planning & Guidance, LLC. Life is more than money. It’s about living the lifestyle you want and can afford. For that reason, Niv consults with clients on money, life, and work. Her approach capitalizes on techniques she learned throughout her career, including as a management consultant, executive recruiter, and financial advisor. Her services include developing comprehensive financial plans, divorce financial reviews, and retirement plans. Niv actively gives back to her community through her volunteer efforts. She believes in living life to the fullest by cherishing friendships, enjoying the beauty of nature and laughing often — even at herself. Her favorite quote is by Erma Bombeck, “When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left and could say ‘I used everything you gave me.’”