Four Reasons Why Your Living Expenses May Not Decline When You Retire

People often assume that their living expenses will decline when they retire--but the baby boom generation ought to challenge that assumption as it approaches retirement age.

Coming up with an accurate estimate of retirement expenses is critical to retirement planning, because this number indicates how large a sum you'll have to save--which in turn forms the basis for calculating savings rates required to build that sum.

Four Retirement Budget-Busting Forces

Rather than simply assuming that your retirement expenses will be a certain percentage of your pre-retirement expenses, you should scrutinize the major areas of your budget and only adjust downward when there's a strong reason for the expense to shrink.

When you plan on how your spending habits will change once you retire, don't overlook the following four factors:

• The never-ending mortgage. Traditionally, a big reason people could expect to need less money in retirement was that their home mortgages would be paid off. Not so with many baby-boomers, who got in the habit of rolling over their mortgages via home equity loans. According to figures from the Federal Reserve, the debt burden of mortgages as a percentage of household income rose steadily from the beginning of 2000 until peaking at an all-time high in early 2008. It has backed off a bit since then, but is still not down to historically normal levels. This is especially disturbing because it runs directly contrary to what one might expect with the bulge in the population represented by baby boomers now approaching retirement, and with mortgage interest rates near record lows. All of this suggests that baby boomers still have a great deal of mortgage principal to pay off.
• The lingering debt hangover. Of course, mortgages are only one form of debt burden facing Americans these days. The credit card binge may be over, but the hangover remains. According to Federal Reserve figures, overall household debt burdens as a percentage of income climbed into uncharted territory in the year 2000--and then kept rising. This measure of debt burden finally peaked in 2008 but has yet to drop back below year 2000 levels.
• Parenthood never ends. People naturally assume they'll have lower expenses once the children are out of the house. The question is, when will they be out of the house? US Bureau of Labor Statistics figures showed that unemployment was staying stubbornly high in early 2010. A weak job market can be especially tough on people who are just starting out, sending many recent college graduates back home to live--often with a sizable college debt burden in tow. In other words, dependency might last longer than you expect.
• Swimming against the tide of inflation. Finally, there's the simple fact that even if you buy less from year to year, most of what you buy will be getting steadily more expensive. This is especially true when you consider one of the biggest expenditures of people in their retirement years: health care, the cost of which has been rising much more quickly than regular consumer goods and services. In short, buying less may not mean spending less. Worse, with rates for savings accounts, money market accounts, and short-term CDs now generally below the inflation rate, it is tougher for savings to keep up.

Each person's situation is different, but considering the financial challenges that many baby boomers will face in retirement, don't automatically assume you'll need less money in retirement than you do now, unless you've already accounted for each of these four issues.

Showing 0 comments | Add your comment