By John R. Berry
We have written elsewhere about how inflation pushes the cost of living up over long periods of time. So I decided to describe a scenario we see in our office all the time: a couple in their 60s who is ready to retire. Their timeline is short, allowing little chance to adjust investments, expenses, and career choices. They hope to maintain their same standard of living and are consulting with us regarding whether that is possible.
Meet John and Becky Jackson*, who are 64 and 62. After long, successful careers and many years spent raising a family, they are looking at retiring in the next year or two. The couple is used to a respectable lifestyle and spends $10,000 a month, or $120,000 a year. They do not have any debt, but do maintain a nice home and enjoy good meals, a little travel, and spoiling their grandkids.
When I describe our projections on their cost of living, I am using 3 percent compounding inflation, which is about the historical average. Thus, I assume expenses next year will be $123,600, whether they retire or not, followed by $127,308 in two years.
If Becky and John retire in two years and each live to age 95, which is a 31-year retirement for Becky, they will spend more than $3.8 million to maintain their same lifestyle.
That sounds like a really big number, right? Well, six years after retirement, which is eight years from now, their inflation-adjusted cost of living will be more than $152,000.
At that point Becky is just 70. The Jacksons’ golden years are just getting started. So here’s their estimated cost of living at other future points:
- Becky turns 80 (2038): $204,000
- Becky turns 90 (2048): $274,000
- Becky turns 95 (2053): $318,000
Although John dies two years before Becky, we don’t assume Becky’s expenses go down. She is still keeping a home, maintaining a vehicle, and spoiling her heirs. So we have a 95-year-old lady who has lived a nice upper-middle-class lifestyle. When she retired her expenses were more in the $125,000 range, but when she turns 95 it will cost her well over $300,000 per year just to keep that going. I will re-emphasize: The sum of John and Becky’s spending over 31 years is projected at $3.8 million.
Now we’re back in the planning stage, when John and Becky are still in their 60s. This scenario usually plays out two ways:
- If John and Becky have enough savings and investments, they likely can maintain their lifestyle.
- If the couple does not have enough savings and investments, they can start trimming—or slashing—expenses now. If they don’t do it now, it will need to happen later.
To keep living as they have been, Becky and John need a substantial nest egg, probably made up of investments designed to keep growing. Social Security will cover around half of their initial expenses at best, a percentage that will go down over time since the annual increases for Social Security are usually very small.
So what do you think of this common scenario? Will you be able to maintain the standard of living you’re accustomed to, or do you think you will have to cut back?
If you’d like to talk it through, please give us a call at (940) 325-9800 or drop us a line at john@cornerpostfinancial.com.
* Couple is fictitious.
John R. Berry is a CERTIFIED FINANCIAL PLANNERTM and owner of Corner Post Financial Planning.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.