Miscalculating Retirement Needs

Most people report that they are financially prepared for retirement, yet most economists and financial advisors say they aren’t. Why the discrepancy? A recent poll from Charles Schwab & Co. has a clue. Schwab polled wealthy workers and found that 80% of those making $115,000 annually believe that in retirement they’ll spend only $66,000 annually.

Perhaps these survey respondents actually have done what I’ve recommended in the past. Maybe they considered the lifestyle they want in retirement, determined what that would cost today, and calculated how much that is likely to cost when their retirement date comes around. Perhaps they’ve also considered the effects of inflation, so they know that the cost of retirement is likely to steadily increase over time. I hope they’ve also considered that retirement is likely to last 20 years or longer for many of them, and that a sizable minority will be retired for 30 years or longer.

The survey isn’t clear how people estimated their retirement needs. I suspect that most of them did a quick mental calculation. They subtracted all the things they don’t expect to spend money on after retiring and didn’t add any expenses for how they plan to spend all the time they now spend working. That’s why a recent study found that most Americans die with $10,000 or less in liquid assets.

The biggest hurdle retirees will almost certainly face is the rising cost of health care.

“Even with Medicare benefits, a 65-year-old couple could need nearly $400,000 to cover out-of-pocket health care costs during retirement, according to research by the Employee Benefit Research Institute,” noted Carrie Schwab-Pomerantz, Charles Schwab & Co., Inc. senior vice president. “The bottom line for everyone is that health care costs need to be carefully factored into retirement plans.”

No one can predict whether they’ll need long-term medical care in the future, but there are steps people should take now to mitigate those issues as early as possible.