Americans are on average living longer, yet many Americans do not have sufficient savings for retirement. 40% of retired Americans over the age of 60 rely solely on Social Security, a median annual benefit of $17,000, for financial support. This is insufficient to sustain a comfortable retirement.
The uncertainty wrought by the COVID-19 pandemic has further underscored the importance of financial planning. Almost 10 million jobs were lost in the US due to the pandemic, with many having to dip into their savings to pay the bills. The impact of the pandemic will last for decades, from medical needs to employment rates to real estate prices. Financial planning is important for both the younger generation and those approaching retirement to set aside funds for the unexpected to allow for a comfortable retirement.
The Hidden Costs of Retirement
The first step in planning for your future is to estimate the amount of money that you will spend after retirement. Estimating your retirement spending needs can be a difficult task as you are making assumptions on your expenditure decades in advance. It is, however, a crucial step in financial planning. You can start by analyzing your current spending and adjusting your estimate based on projected increases or decreases. Utilities, mortgages, and taxes are common expenses that people factor in while planning for their retirement but there are many other expenses that people tend to underestimate or miss out on.
Home and car maintenance, for example, are big ticket items that are often omitted when people are planning for their retirement. These items can easily wipe out a chunk of savings if unplanned for. The good news is that these big ticket items are mostly predictable, and can be factored into your retirement plan.
Entertainment costs are another factor to consider when planning for your retirement. The entertainment budget for a working adult may not be realistic for a retiree who no longer has to commit to a five-day workweek. Furthermore, it is common for retirees to go on holidays to travel around a different country or to visit family living abroad. You are likely to spend more on entertainment after retirement, and should be adjusted accordingly when planning for your future.
Healthcare costs form a significant, yet often underestimated portion of retirement expenses. The cost of prescription drugs, for instance, have been rising for almost a decade and have seen an increase larger than any other medical goods or services. The current prescription drug prices is not a realistic estimate for retirement as the upward trend on prescription drugs may continue for years to come. Another healthcare cost that is typically neglected is the need for long-term care. An estimated 52% of Americans above the age of 65 will require long-term care at a certain point in their lives, with lifetime long-term care averaging at a staggering amount of $172,000. These hidden costs must be factored in for a successful retirement plan that will allow you to live comfortably in old age.
Supplementing Your Retirement Income
With so many hidden costs to consider for your retirement, many retirees may find themselves falling short of funds required to make ends meet. Here are some ways in which you can supplement your retirement income:
- Getting a job may sound a little ironic since the point of retiring is to leave the workforce. However, many seniors struggle with loneliness and boredom upon retirement. Working part-time during retirement is a great way to occupy your time, engage in social interactions, and most importantly, earn some extra income.
- Selling your house and downsizing or moving to a cheaper area will free up some cash that can be used to supplement your retirement income. This is a good time to sell your house as home prices in the US continue to soar in 2021 due to high demand. If selling your house is not an option, you may wish to borrow money against the equity of your home. The surge in home prices have also led to an increase in reverse mortgage limits in 2021. Alternatively, you could generate an income by renting out your home, either full-time or seasonally.
- If you have life insurance, your policy will accumulate cash value over time. You can typically cash out a fraction or the entire value of your policy whenever you wish to. You could even invest some of the extra money to generate an additional stream of income.
Sound financial planning is crucial to leading a comfortable life in old age. There are many hidden costs to consider when planning for retirement, such as the rising cost of healthcare. If you find yourself struggling financially in retirement, exploring some avenues to supplement your income will go a long way towards making ends meet.