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Retirement may cost more than you think

By Beth Henary Watson

October is my birthday month. I am now 42. While 40-somethings are on the younger end of those who normally seek professional financial advice, this age—or even youngeris a good time to consider retirement planning. Time is still on your side!

A common retirement-planning challenge is that the cost of living creeps up over time and bites you. This is called inflation. I wonder: Could it bite me?  

Using our financial planning software, I ran the numbers on what my cost of living would be each year through age 100, assuming my household spends an average American income of $70,000 a year. I also assumed inflation will run a flat 3 percent throughout my lifetime. This is around the historical average.

Good health runs in the family on my mom’s side, so don’t scoff at my guess that I’ll live to 100.

Are you ready for an eye-popping figure? When I turn 100 in 58 years (2078), I may see a cost of living of $388,000! That is $70,000 a year inflated at 3 percent annually.

Here is my estimated cost of living a $70K lifestyle at other future points:

Age 50 (8 years away): $88,000
Age 65: (23 years away): $138,000
Age 80: (38 years away): $215,000

When describing how rising costs destroy spending power, we financial planners often give an example from the grocery store. In the early 1980s, a Snickers candy bar was about 30 cents. Today, I look down at the checkout counter, and the same thing is $1. It’s more than it was, but it’s still just $1. 

A dollar just doesn’t sound like a lot of money. I think it’s more instructive to apply the reality of inflation to your whole lifestyle, not just a small treat.

Here’s an example that might strike home for many current and prospective financial planning clients. If you are 50 years old and your household spends $100,000 a year, in 15 years you’ll need about $155,000 just to maintain the same standard of living. When you turn 100 half a century from now, your $100,000 lifestyle could cost over $438,000.

Possible solutions

If you don’t have a good grasp of the role rising prices might play in your future, there’s good news! That’s one of many things we look at daily in clients’ financial plans. 

Of course many factors come into play, including your age, years until planned retirement, current savings rate, existing nest egg, and expenses. 

I would not be much of an advisor if I presented a big challenge without offering any possible solutions. If the numbers above surprise you enough to give us a call, below are some strategies we might discuss. One or a combination of these could help better position you for many happy golden years.

Lower expenses. Easier said than done, right? Still, decreasing your cost of living drives all the numbers down. Back to our client currently spending $100,000 a year. If you work to pay off cars, mortgages, credit cards, and other debt, over time you might get your expenses down to the national average of around $70,000. That makes it way cheaper to retire, costing just $109,000 in 15 years instead of $155,000.

Put increased income to good use. If your retirement’s in a precarious position, increasing your income might actually be a bad idea unless you use the extra to pay down debt or save. Otherwise, spending it all makes your future scenario that much bleaker by raising your cost of living even more. If you already make an above-average income, strive to slot any increases gained by a big promotion or even modest cost-of-living bumps toward saving for retirement or paying down debt. 

Review your investment strategy. An investment strategy is very personal, perhaps a hodgepodge of your individual interests, education, fears, and timeline. Still, it’s important to realize that if you aren’t averaging at least 3 percent investment returns, you are losing out to inflation. Have an advisor review all of your investments, including retirement accounts at work and elsewhere, cash in the bank, income-generating properties, and pensions coming to you. Ask the advisor if you are invested too conservatively, too aggressively, or just right for your goals.

If you suspect hard choices are ahead, consider making them now. If you are providing support to adult children to the tune of several thousand dollars per year, yet the above numbers scare you, consider having the tough conversation today. This is just one example of putting on your own oxygen mask before helping others with theirs. 

Other blind spots in your spending could be over-gifting at Christmas, over-treating yourself, or even charitable giving that you cannot afford. Look at what goes out of your bank account. If there are some big amounts that aren’t necessary, consider cutting back to strengthen your own situation. That way, there’s less of a chance that your older self will need to rely on your children or on charity!

On the earning side, be honest. Do you need to explore a career change or side business? Are you underpaid, or do you need to plan to work longer? 

Even though you might be comfortable in your position today, consider if you are fairly compensated and whether you can or should stay in your current job until you retire. If the answer is no, it’s easier to shift course when you are younger. 

I’ve presented these inflation-adjusted lifestyle numbers to a few friends. In many cases, there’s denial. Like it or not, though, we must assume that it will cost all of us more to live in future years than it does today. Keep in mind that in the 1920s, you could buy a car for under $500.


Beth Henary Watson is a CERTIFIED FINANCIAL PLANNERTM with 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. 

Securities and Advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.  

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