Retirement is the most expensive undertaking most people will make. Unfortunately, many soon-to-be retirees fail to properly plan. As stated in a Wall Street Journal Article, “Why the Conventional Wisdom About Retirement Spending is Wrong”, retirees often mistakenly assume that they will spend the same amount in retirement as they do while working. This is typically not true; most retirees actually spend less.
This is due to a drop in work-related costs such as Medicare and Social Security Taxes, commuting costs and saving for retirement. It can also be hoped that expenses like mortgages and college education will be disappearing in retirement – although recent studies have shown an increase in such expenses. Also, retirees typically have lower income tax rates due to their lower income. It is estimated that a retiree only needs to be able to replace approximately 80% of their income in retirement. Households with high levels of income will generally have a lower replacement rate – meaning that even though they might need more income in retirement it is a lower percentage of their working income than low-income retirees.
The main concern for retirees is health care costs. Health care costs have historically risen 50% faster than general inflation. The greatest concern in planning for health care costs is nonrecurring costs such as nursing home care or hospitalization. These expenses are hard to predict – they will either have little impact or a large impact. This can be planned for in purchasing a long term care insurance. The Wall Street Journal article recommends that those who do not wish to purchase long term care insurance be prepared to view their home as a “last resort” that can be sold if necessary.