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Do Most People Under Estimate How Much They’ll Need for Retirement?

A prospective client asked us this question yesterday (thanks HG) and it made us stop. After some reflection, I answered, “yes” and here’s why.

First, most people underestimate the impact of inflation. At a 3% annual rate, inflation eats away at buying power. For example, a couple age 65 that retires today and needs $9,270/month to live on, will need $23,000/month for living expenses when they are 95! That’s almost 2.5X more each month.

Second, many people assume that when they retire they will have lower living expenses compared to their living expenses when they were working. In fact, most people when they retire spend the same or more as when they were working. Think of it this way: do you spend more money on Wednesday or Saturday? Most of us spend more on Saturday; well, when you retire, every day is Saturday.

Finally, the rate of return you receive on your investments will probably be lower in retirement. It is natural (and possibly advisable) to be more conservative in your investing approach in retirement. Whereas you might have assumed a 7% rate of return for your pre-retirement portfolio, a 5% annual rate of return might be more realistic in retirement.

There are other factors that might fool a person into under estimating their retirement living expenses too. For example,life expectancy is probably age 95 and many people don’t realize or plan for this; similarly, there may be large health care or long-term care expenses that are not expected.

In sum, all these factors cause most people to under-estimate what they will spend in retirement.  Want to learn about common retirement planning blunders and how to avoid them? You’re in luck!

Amy Shappell, CFP®, and I will go over the most common retirement planning blunders we see and what you can do to avoid them at a free Webinar at 6:00 p.m. (PST) on May 23. It will be filled with lots of practical tips, actionable ideas, good stories and a question and answer session. You won’t want to miss this opportunity.

It’s free, but you have to REGISTER to get the log-in instructions. Go here to REGISTER NOW!