January 9, 2005 -- Traditional financial planning has held that when you retire, you should expect your expenses to decline by about 20%, however the reality of your retirement costs depend on whose terms you retire. Many retirees depend on Social Security as the primary source of their income when they retire and as a result, most of these folks will see a reduction of their expenses not by choice but out of necessity. For those that retire on their own terms having saved enough money (or at least what they believe to be enough) tend to find that their expenses remain consistent with their pre-retirement levels and during at least one phase of their retirement may actually increase. This can have a dramatic effect on what amount of money you should accumulate before sending out the invitations to your retirement party.
In fact, real life experience has taught us that there are three primary phases of retirement for those that retire on their own terms. The first is the go-go period. These are the first years of retirement and are typically the years that most retirees are in their best health and are busy traveling and doing all those things they dreamed about but could never do because they had to work. In the go-go phase, it is not uncommon for annual expenses to actually increase over the pre-retirement period. Often this is a temporary and well deserved period in a retirees life. After a few years of the go-go lifestyle most move into the next stage of retirement.
Following the go-go phase, most retirees will migrate into what I call the slow-go phase where the retirees essentially decide to slow down and catch their breath. This phase typically sees expenses return closer to their pre-retirement levels (on an inflation adjusted basis). This period tends to last the longest of the three retirement phases and often is the most predictable in financial terms. Eventually, many retirees transition into the final stage of retirement; the no-go phase.
The beginning of the no-go phase is unpredictable but usually begins with a marked change in the retirees health. Health care issues often prevent the activity that has been enjoyed during the go-go and slow-go phases and the financial implications can be dramatic. With healthcare costs spiraling out of control, too many retirees find that they are unprepared for the financial reality of healthcare. Lifestyle expenses continue at their same rate, however a long-term care situation can easily add an additional $50,000 per year of additional expenses per person. This increased cost can have a devastating effect on the financial health of the individual and is why long-term care insurance coverage which includes home health care is critically important.
Even if retirement seems so far down the road that it is hard to fathom, it is important to lay the proper foundation for it as early as possible. Being realistic in your assumptions regarding the real costs of retirement can make all the difference between a comfortable retirement or one that is spent in financial turmoil.
About Heritage Financial Planning
Steve Blankenship, CFP is principal of Heritage Financial Planning, an independent financial planning firm located in Grapevine, Texas. A Certified Financial Planner professional, Steve was recently featured on the cover of Financial Planning magazine and profiled in the related article. Steve has also just been named as one of the Best Financial Planners in Dallas by D Magazine. He is a Member of The Garrett Planning Network, Inc., the nations largest organization of hourly as-needed financial planners. He is also a member of the Financial Planning Association, the largest organization of professionals dedicated to championing the financial planning process. He can be reached at (817) 310-5171. For more information, visit www.HeritageFinancialPlanning.com.
Contact:
Steve Blankenship, CFP
Principal: Heritage Financial Planning, Grapevine, Texas
Phone: Phone: (817) 310-5171
Web: www.HeritageFinancialPlanning.com
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