ARBOR OUTLOOK: Go-go, RV’s and a river cruise
Editor’s note: This is the second in a three-part series on retirement.
“I thought I’d saved some but, you know, it’s funny: There’s too much month at the end of the money.” — from “Too Much Month” as performed by Marty Stuart
The go-go years occur just after retirement. We take that European river cruise we’ve been dreaming of. We buy that RV and tour the national parks. After a time, we settle into the second stage, or slow-go mode. More content to stay at home, we tend to grandchildren and gardens, and enjoy the slower pace. Eventually, many of us evolve into virtual no-go status. Health issues and age sometimes weigh on our activities. Travel can become difficult.
Retirement spending is reflected by our activities in each of these three periods. The go-go years require some capital outlay: airline tickets, hotels, motor homes and more. Then as we transition into the slow-go and no-go years, our spending decelerates.
The irony is that health care costs, which represent the wild card in retirement budgeting, accelerate as we age. We spend 20 percent of our cash flow on health care costs at age 85, as opposed to only 10 percent at age 65.
So how much money will we need? One popular formula states that if you start saving for retirement in your 20s, you’ll need to invest 10 percent of your annual income. If you start in your 30s, you’ll need to allocate 20 percent of your annual income to investing. And so on. Of course, the amount of your annual income, and thus how much you’re putting away, also plays a large role in building a significant nest egg. But one ignores the power of compound interest at one’s own peril: the longer your money stays invested, the more it can grow.
Another popular theory espouses that in retirement we’ll need about 80 percent of the net cash flow that we enjoyed while employed, if we are to maintain the same lifestyle. How is that we need less money? We no longer contribute to retirement plans, and some expenses are reduced. Still, few Americans have various streams of income that equal that number.
Many retirement expenses can be planned. For example, we usually know when our house will be paid off. But again, health care is the outlier. A recent Wall Street Journal article states that a 65-year-old couple, recently retired, will spend an average of just under a quarter million dollars on health care expenses after they stop working. This is in addition to costs paid by Medicare. Let’s say the couple both live to, oh, age 87. That’s a retirement span of 22 years. That means they’ll spend an average of over $11,000 annually, or about $950 a month, on health care costs during retirement. That’s a significant line item to prepare for.
Margaret R. McDowell, ChFC, AIF, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.