The importance of accurately modeling retirement spending needs for a retirement projection is vital, because relatively small change to spending can add up to make a big impact on the clients overall success. This article from CNNMoney discusses the different phases of retirement and the importance to not under estimate expenses during the last phase of retirement.
Retirement saving: Don’t shortchange the later years
By Walter Updegrave
January 27, 2012
When modeling expense in retirement, it’s common practice to factor in a bump up of spending for the first several years, as a newly retired clients look forward to enjoying retirement and crossing some items off their bucket list.
This first phase of retirement, referred to as the “go-go” phase by Michael Stein in “The Prosperous Retirement”, is followed by the “slow-go” phase, where clients are more settled into a routine, where they are still active, but not with the same vigor as the first phase. For planning purposes, this might be considered the baseline spending for retirement.
The “slow-go” phase transitions to the final phase of retirement, the “no-go” phase, where clients become less active. This phase is commonly associated with reduced spending, as the need and desire for high-ticket items like vacations or new cars decreases.
While this final phase of retirement has been associated with reduced discretionary expenses, nondiscretionary expenses like medical costs could quickly make up the difference, potentially making it the most costly of the three phases. This article also goes on to point out medical cost might not be the only surprise.
Many people are underestimating the number of years they will be in retirement, anticipating a shorter life expectancies than they should. “A 2006 Society of Actuaries report found that only 29% of retirees and 30% of pre-retirees thought they would live longer than the average life expectancy. In reality, closer to 50% will outlive the average.”
When helping client’s plan for retirement, we know the importance of using conservative rates of return, because the market is unpredictable. This article stresses the importance of being conservative with all of our planning assumptions. Assumptions are necessary to model potential future out comings, but are inherently uncertain. Being conservative with our assumptions, including retirements spending need and life expectancies, should lead to better planning and discussions, helping to lead clients to a more comfortable and secure retirement.
Silver Financial Planner – Enter the baseline spending amount in the in “Annual expenses during retirement” field in the Income/Expenses section. Take advantages of the “Special Expense Planner” to add additional expense for “go-go” phase, setting the start year as the first year of retirement, and the number of years for this “go-go” phase to continue. The process would be the same if you wanted to show the possibility of expenses increasing the final years of the projection due to a Long Term Care situation.
TOTAL Planning Suite – TOTAL gives you more flexibility with changing expense items in the future, thanks to the age change tables. You can use the age change tables to adjust the personal expenses amounts at any age.