Retirement. It seems so far away. Something to worry about later. Many employees and self-employed individuals feel saving for retirement is a discretionary expense that can be pushed into the future. In politics, they have an expression: “Kicking the can down the road.” Here are nine reasons your clients might need far more money in retirement than they think:
1. Social Security is a component, not income replacement
Some people still assume this government benefit they’ve contributed to during their lifetime is meant to support them in retirement. It is only one component of retirement income. Remind clients to think of retirement income as a three-legged stool. Social Security is one leg, income from annuities or defined benefit pension plans is the second leg, and income generated by savings and investment is the third leg. And fewer people have that second leg these days.
2. Client will probably live longer than they think
The average life expectancy in the U.S. is about 76 years. But if plenty of their relatives are in their 80s and 90s, they have a good shot at this too. If they live in a major metro area with excellent hospitals and their family doesn’t have a history of major disease, they might live a lot longer than average. If they exercise and don’t smoke or drink to excess, they might reach 100. Here is a life expectancy calendar. Tell clients they should plan for their income to last their lifetime.
3. Their spending might increase in retirement
Some expenses will go down when you stop working. For example, you need fewer sets of business clothing, you eat lunch at home and you are no longer commuting. But with lots of time on your hands, might take more vacations, play more golf and eat out frequently. Remind clients that fun comes at a cost — which can be hefty, depending on their interests.
4. Expenses will increase. Fixed income will not
Many plans like annuities or pensions start paying a certain amount and stay at that level. And even if your clients receive cost-of-living adjustments on their pensions, inflation may drive up prices even more for the things they spend money on. A good concept to consider is the Rule of 72. An interest rate divided into 72 lets you know how many years it takes to double. Put another way, if inflation is 6%, household expenses will double every 12 years. Your clients need investments that ideally grow faster than the inflation that is driving up their expenses.
5. Some expenses grow much faster than inflation
Heathcare is a good example. Since 2000, the price of medical care (including services provided, drugs, medical equipment and healthcare insurance) has risen by 115.1%. Over this same period, the prices for all consumer goods and services rose by 78.2%. Some expenses only go in one direction.
6. Medicare doesn’t cover everything
The previous point might not bother your clients because at age 65 they can be covered under Medicare. They will still need supplemental insurance. Even if they see plans on TV that might have little or no cost, they do not know what the future holds. In addition to supplemental premiums, policyholders often have out-of-pocket deductibles.
7. Long-term care is an issue
Many people fear that they might live a long life but their body won’t cooperate. They might have adequate income to support themselves in retirement in the early years, but will need additional care in their later years. Long-term care can cost a lot more than cruises. Clients may be unable to pay for long-term care expenses unless they plan ahead.
8. Taxes are an issue
Although your clients’ income tax situation might be under control, property taxes and school taxes seem to increase year after year. (School taxes aren’t always included in property taxes). This expense is beyond clients’ control unless they downsize or move to a community with lower taxes.
9. Your clients want to sit on a pile of cash
This means they will need more money — one pile to cover ongoing living costs plus whatever cash they don’t want to tap for those expenses. The reasoning for sitting on this cash pile may be that they want to ensure they have money years from now that will allow them to continue to live independently. People often don’t want to have to move in with their children. Another reason for wanting money they won’t touch in their lifetime may be that theywant to leave a legacy to the next and subsequent generations. Or they have charitable causes they want to support with their estate. Help clients understand how much they’ll have to fund both piles to meet their needs and goals.
Many people equate retirement with “The Golden Years.” These years require gold. Not the precious metal, but the cold cash.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor” is available on Amazon.