A great deal has been written about the problems of retirement. After working for anything up to and beyond four decades everyone deserves a comfortable retirement. As life expectancy increases that may be another couple of decades, even more. The question arises about how to finance those years of retirement. Much of what is written today focuses on the lack of provision Americans are making for retirement. There is a Social Security System paying monthly benefits from as early as 62 year old yet these benefits were never designed to fully finance retirement. They are totally inadequate for doing so and too few are saving sufficient money to live the lives they hoped for after retirement.
Debt Is an Issue
It is difficult for anyone to predict how much they will need to live comfortably in retirement. Although people are living longer the cost of medical care increases by the year and inevitably as people age they are likely to face more bills. One thing that everyone should avoid is going into retirement with high interest debt. The obvious example of this is the credit card. Too many Americans have balances that attract high interest at each month end. Card users merely pay the minimum that the terms and conditions require. Card companies make their money from people carrying balances so they have no problem with this debt level. Individuals with this debt face a problem however and if they are able to get an installment loans to pay off a balance in full they will be saving money over the coming years.
Assuming a retired couple have no such debt it is an interesting exercise to see what they might need to finance their daily lives.
The Bureau of Labor Statistics provides an idea as a good starting point:
- Some costs will come down in retirement. If the mortgage term has finished then they fall dramatically. Alternatively real estate can be sold to help finance retirement. With the children gone, it is entirely practical to downsize or even rent. The Bureau talks about $1,300 per month.
- There are no costs involved in going to work and perhaps a second automobile is no longer required. The Bureau identifies an average of $570 per month.
- Health is the real issue and any average can be wildly inaccurate. For the purpose of this exercise the Bureau states $480 per month.
- Food expenditure is $460 per month and it seems it is not the case that a retired couple will eat out more frequently after they have retired.
- Entertainment likewise need not increase; $200 per month
- Personal Insurance $230 per month
- Cash Donations for those that can afford them: $200 per month
- Sundry spending on clothing, books etc $300 per month
That adds up to $3,740 per month, around $45,000 a year. One guide to how much a couple would need in a fund is annual expenditure as 4% of the retirement total. Clearly this suggests a couple will need $1m in that fund although of the $45,000, Social Security benefits are likely to provide $2,000 for a couple each month. In other words the $45,000 is almost halved in which case the fund required would be halved.
The Real Problem in the USA Today
The problem is that few people have that amount in their funds. Some people admit to having nothing at all and it is only a very small minority that have sufficient to mean they will have few worries.
Perhaps you have many years of your working life to go? If you do there is really no excuse for not planning for the future. If you are still in your 20s and save even a small amount a month then compound interest will help it grow substantially. If you are in your 40s time is not on your side; even worse if you are within 10 years of retirement. The amount that you will suddenly need to set aside will mean a marked difference in your monthly spending. If you have credit card debt as well then frankly your prospects are not very good. Doing nothing is not an option unless you want to struggle every day to meet your bills once you have retired.