Forbes Magazine ran a cover story entitled "Retirement: Why You Won't Need As Much As You Think". In the article, economist Laurence Kotlikoff stated that most financial planning calculators and software programs overestimate how much money you should plan on spending in retirement. And not surprisingly, he has developed a software program called ESPlanner that he claims will do a better job of determining how much money you?ll need in retirement and how much insurance you?ll need to protect yourself and your family.
The article cited statistics showing that people tend to spend less in retirement. However, the experts were unsure as to whether or not the primary reason behind those statisitcs was the fact that past retirees did not save enough for retirement and had to spend less or whether it's because retirees in general can actually live on less. Many have paid off their mortgages and do not have work or child rearing costs.
One study based on detailed food diaries found that retired households spend 31% less eating out than nonretired ones. While they still go to table-service restaurants, the study found that retirees make six fewer stops each month at fast food restaurants. Another study found that while retirees played more rounds of golf, they are more likely to play during the week, when greens fees are lower.
A woman in her 60s who was interviewed for the article said that she spent more money in early retirement but that aging and a hip replacement had slowed her and her spending down. "My older friends in their 80s don't go out as much," She says. "It's a natural phase."
While the statistics cited in the Forbes article to support the premise that we may not need as much in retirement as we think were interesting, they were, for the most part, outdated and irrelevant. Instead of looking at the lifestyle and spending patterns of past retirees, I believe that the article's author, Janet Novack, should have spent more time examining the lifestyles and spending patterns of the baby boomers now heading into retirement. She should also have done more to address the improved health and increasing longevity of today's retiree, the steadily rising cost of healthcare and the fact that most Americans do not have long-term care insurance. When those issues are considered and addressed, the only rational conclusion is that future retirees will need more money than they have been led to believe to live comfortably throughout a longer, healthier, more active and more expensive retirement than what past retirees experienced.
On the whole, the baby boomers now heading toward retirement are more affluent, spend more and are more active than their parents? generation of retirees. They are also doing more to keep fit and maintain their level of health, and medical science is helping them out. Recent medical studies have concluded that today's 70 year old is as healthy and active as a 50 year old thirty years ago. And there is no question that today's retiree is going to live a longer, more active and healthier retirement than past retirees, and it's going to cost a lot more money.
In addition to my other criticisms, the Forbes article did not address the fact that returns on stocks and bonds going forward will likely be substantially lower than what most people expect and are using as the basis for their retirement planning assumptions. Economist Kotlikoff stated, "If your spending target is too high, you may find yourself pushed toward a riskier asset allocation than you?d otherwise favor." While that may be true for individuals who are not working with an experienced, trusted financial planner, those who are will be advised that rather than employing an overly-risky asset allocation to meet their retirement goals they will simply need to save and invest more money, more often. And while many will assume that they can't, a close examination of where their money goes each month will likely show that they can in fact save more money, more often.
In the final analysis, I still firmly believe that you should plan to need at least enough cash flow to meet your current level of spending in retirement. And as I mentioned in last month's newsletter, many top financial planners believe that you may need more, maybe enough to meet as much as 120% of your pre-retirement cash flow needs.
If I'm being overly conservative, then the worst that will happen is that you?ll have more of a financial cushion to ensure a long, comfortable retirement. You?ll also be better able to pay the high cost of the long-term care you are likely to need in the last years of your life, assuming you do not have long-term care insurance. Otherwise, the high cost of long-term care could potentially deplete your nest egg, jeopardize your financial security and leave you with nothing to pass to future generations. Considering that possible scenario, doesn't it make sense to be better prepared for retirement than to risk the possibility of enduring a retirement full of worry and insecurity? I think so. Start now.
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