Dave Kennon, Kennon Financial
As an 18 year veteran in the financial industry, I’ve been trained, repeatedly, on how to design a retirement financial plan. I’ve come to the conclusion that many of the assumptions present in generic planning software are inaccurate. One common variable which nearly every planning tool emphasizes is the effect of inflation.
Most tools assume a 3% inflation rate throughout your retired years. If you do the math, that means that a gallon of milk which costs $5 now, will cost $10 twenty-four years from now.
While a 3% inflation rate is a reasonable assumption, it can really throw a wrench in most retirement scenarios. It stands to reason that if your budget is presently $4000/mo, you can expect for it to rise to $8000/mo a quarter century from now.
A little scary, isn’t it? Maybe you should just sit on all of your savings as long as possible so that inflation doesn’t ruin you. You don’t want to enjoy your 90’s living in a cardboard box behind a gas station.
Luckily I have great news. The fear of inflation is a bunch of B.S. Or more accurately, the underlying assumptions in these calculations are missing one enormously important factor:
You will spend significantly less money in your 80’s and 90’s than you will in your 60’s and 70’s.
The U.S. Bureau of Labor Statistics found that retirees between the age of 65 and 74 spend 35% more money than retirees older than 75. (source)
The Government Accountability Office found that Americans spend 41% less in their early 70’s compared with their late 40’s. (source)
How can this be?
1. You pay off your mortgage. This is an important variable to consider when designing a retirement budget. If your $1200 mortgage payment is going to end in six years, you need to account for that reduction in required monthly funds.
2. You will spend less on clothing, travel, gas, food, and entertainment.
3. You will not be buying a new car every few years.
4. Medical expenses generally do not increase until the end-of-life stage at which point there can be a small spike in spending. Remember that 90% of retirees in America spend less than $2000 a year on medical expenses while on Medicare.
Another key factor to remember is that your social security payments will grow with inflation. Social Security increases are based on the Consumer Price Index (or CPI).
Let’s say Bobby Biggins retired 25 years ago with a social security benefit of $1000/mo. Today that same benefit would total $1755/mo. (source)
For 2019, a 2.8% increase has been announced. For those of you receiving Social Security, you will see the increase this month. If you have yet to take Social Security, the 2.8% is still added to your future benefit.
So, to review, as you get older, inflation will increase the costs of goods and services, but this increase is offset by the natural reduction in spending as you age.
So what does all of this mean? For many of you, you may be able to spend more money earlier in your retirement.
Don’t let the online retirement calculators fool you. You may be in much better long-term shape than you realize.
This is yet another powerful driver behind The Retirement Revolution. An essential component of the Revolution involves a certain degree of re-education. Most retiring Baby Boomers have the same common misconceptions, most of which can sabotage your retired years.
Just to review:
Inflation will not bankrupt you.
Medicare covers more than you may think.
Social Security is not going insolvent.
Taxes in retirement are generally lower than people realize.
I would encourage you to check out my latest book: The Retirement Revolution: Spend More, Worry Less.
Yes, that is a shameless plug. But the book contains all the answers to common misconceptions that create needless fear, worry, under-living, and over-saving.
I am on a relentless mission to help Baby Boomers escape the vicious cycle of living scared and dying rich. And I need your help. I know you have friends and family who need to hear what I have to say. Please forward this email. The Revolution needs you!
Dave Kennon, Kennon Financial
There is no certainty that any investment strategy will be profitable or successful in achieving your investment objectives. An index is a portfolio of specific securities. Indexes are unmanaged and investors cannot invest directly in an index. Index returns are “total returns” with dividends reinvested, which means the return is not only the change in price for securities but any income generated by those securities. The performance of an unmanaged index is not indicative of the performance of any particular investment. Investments offering the potential for a higher rate of return also involve a higher degree of risk. Past performance is no guarantee of future results. Actual results will vary.