Imagine getting in your car to start a long road trip. Before you leave, you probably enter your destination in the GPS. As you drive, you pay attention to the device and follow all of its instructions. And yet, you somehow end up at the wrong destination.
How does that happen? Pretty easily if you input the wrong destination. Plans are dependent on their inputs and assumptions. It doesn’t matter how closely you follow the plan if the plan itself is built on faulty logic.
While most people likely wouldn’t spend an entire journey following wrong directions, there are plenty of workers who are following a savings plan that has an incorrect target. If you’ve put any time into planning your retirement, you’ve likely used some method to estimate your savings goal. You may have used that goal to determine how much money you need to save on a weekly or monthly basis.
However, if that savings goal is wrong, your savings rate could be incorrect as well. It’s possible that you may be saving less than you should. If you continue down that path for too long, you may not have time to correct course before retirement.
Below are a few reasons why people often underestimate their retirement savings goal. Do any of these sound familiar to you? If so, it may be time reassess your retirement planning.
You underestimated your retirement spending.
In many ways, your retirement savings goal hinges on your projected spending levels in retirement. The whole point of saving for retirement is to accumulate assets you can use to support your lifestyle. While you may have income from Social Security, pensions, and other sources, it’s likely you will also need to generate income from your investments.
The exact amount of income you may need to generate depends on your expected spending. The less spending you project for yourself, the less savings you may need.
Unfortunately, it’s not a given that your spending will go down after you retire. In fact, it could go up, at least in the short-term. When you retire, you may have more free time than you have ever had in your life. You might fill that time with shopping, travel, expensive hobbies, and other costly activities.
Review your spending projections. Are you counting on a large decrease in spending after you stop working? If so, you may want to look at a new projection to see how much more savings you may need if your spending level doesn’t go down.
You didn’t account for healthcare costs.
Many retirees assume that Medicare will cover all their medical expenses. Medicare is a valuable resource, but it doesn’t cover everything. In fact, Fidelity estimates that the average 65-year-old couple will pay $260,000 in out-of-pocket medical expenses during retirement.1
If you didn’t include these costs in your retirement projection, your savings goal may not be accurate. Of course, you can’t predict exactly what your medical expenses will be. However, just being aware that you could face healthcare costs will help you prepare.
You forgot about inflation.
Inflation is a subtle cost because it’s rarely noticeable on a short-term basis. Over time, though, it can be a corrosive threat to your retirement. Inflation is the annual increase in prices. Usually inflation is modest. However, even a 3 percent annual inflation rate would cause prices to double over a 24-year retirement.
Keep in mind that you don’t just need to hit a spending target when you retire, but you also must keep up with rising prices throughout retirement. If you didn’t consider inflation, you may be underestimating your needs.
Ready to reassess your savings targets? Let’s talk about it. Contact us at Bam Advisory Group. We can help you analyze your needs and develop a strategy. Let’s connect today.
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Principal of BAM Advisory Group