“Like tossing up a coin.”
That’s Michelle, a 51-year-old teacher from Portland, Oregon. A guest on the new podcast I’m hosting for AARP, Michelle is talking about whether she’ll have enough money for retirement. To her, the answer seems up to chance, as if she could make all the right financial moves and still be blindsided by expensive surprises.
She’s not wrong, says aging expert Ken Dychtwald, CEO of the research and consulting firm Age Wave. In partnership with Merrill Lynch, Dychtwald has conducted retirement research on over 50,000 individuals. His body of work points to five chief budgetary pitfalls — dangers confirmed by the day-to-day experience of some smart financial advisers I’ve spoken with. Knowing where those surprises are lurking and how to preempt them when possible is both in your power and a smart move.
Here’s what to look out for.
1. Rises in the cost of living
Eggs are priced 131 percent higher today than they were in 1988. Houses cost 194 percent more. In other words, it’s not just college tuition and health care that take a beating from inflation. “I’m a reasonably well-educated, intelligent guy, and yet inflation is befuddling to me,” Dychtwald says. He’s not the only one. We humans have trouble envisioning the needs of our future selves, and inflation makes it even harder to forecast our financial requirements. You can help yourself by signing up for cost-of-living adjustments where they exist (disability and long-term care insurance policies, for instance) and locking down costs that you can. Good example? A paid-off mortgage (or even a fixed rate mortgage) means your monthly housing cost will never rise.
2. Providing financial support for family members
One common threat to budgets is the desire to help grown children (and sometimes grandchildren) who are struggling financially. “Periodic gifts to kids to help with routine items such as child care or cellphone payments have a tendency to morph into ongoing and more significant expenses over time,” notes financial adviser Mark Eskin, of Stedmark Partners in Philadelphia. Dychtwald calls this practice being the “family bank.” The role usually falls not to the family member with the most money but, rather, to the one who is most financially responsible. The burden is widespread: Six in 10 people age 50-plus are providing financial support to family members, according to Age Wave, at an average cost of $15,000 over five years. “We saw caregiving coming,” Dychtwald says. “We didn’t see this coming.”
3. Expensive daily activities
During your working years, you’re time-starved, but once you stop working, you may have enough time to do whatever you want. That can get boring. (Retirees watch, on average, 49 hours of TV a week, Dychtwald observes.) This freedom can get expensive, too, especially when your desire to keep up with others, and hang out with them, doesn’t end. “Having a group of close friends to enjoy retirement with is a wonderful blessing,” Eskin points out. But he often sees retirees outspending their means because they don’t know — or fully appreciate — the extent of one another’s wealth. Being asked to serve on the board of a local nonprofit, for instance, is often a great use of time, but the organization may also want your continuing financial support. “Even doing good can be unexpectedly expensive,” Eskin cautions.
4. Paying for health care
Every year, Fidelity Investments publishes an estimate of the amount that a 65-year-old couple will need for health care in retirement. The most recent number, $280,000, sounds ridiculous until you break it down; it translates into roughly 20 years (for men) and 25 years (for women) of Medicare premiums, copays and prescription costs, or about $5,000 to $6,000 per person per year. While the cost of that health care shouldn’t be astounding, the impact of illness still is, Dychtwald says. Illness is “the No. 1 reason people wind up not working as long as they think,” he adds. What’s more, “most people are unbelievably surprised by the cost. They’re not secret numbers, but because they’re so unpleasant, we don’t consider them.”
5. Living longer
Finally, there’s longevity in and of itself. Though there have been many headlines about our longer life spans, Dychtwald says the extra years still come as a shock. In part that’s because we misunderstand the concept of an average life span.
When you read that the life expectancy of a 65-year-old woman is 87 and that of a 65-year-old man is 84, that means many people pass their gendered benchmarks and keep going. One in 4 pass 90; 1 in 10 pass 95. You get the idea. Which means that if and when you use a retirement calculator, you should plug in at least “95” when you’re asked how long you expect to live. Maybe “100.”
This brings me back to Michelle from the podcast. We paired her with Manisha Thakor, a financial planner at Brighton Jones in Portland, so Michelle could get a clearer picture of her present-day financial resources and her future needs. “It was good to see all the numbers on paper,” she said. “It felt empowering that I could finally get a bit of control because I had some data to help me make decisions.”
Listen to the full episode as Michelle works with a financial advisor on retirement planning