One of the famous segments of the 1987 play and 1989 movie Driving Miss Daisy is the trip to Mobile to celebrate Miss Daisy’s brother’s birthday. Holding firmly to the map in the back seat, Miss Daisy became confused, told Hoke to make a wrong turn, and they found themselves far off the planned route. Even now, with GPS units built into a phone or automobile, we chart a planned course for our destination and adopt course changes when circumstances indicate.
The same is true when it comes to retirement. Charting this course is not dissimilar to planning a golf shot in the accompanying image from the Chart Hills Golf Club. The slightest error in planning this shot can result in many costly extra shots. We have written many times about planning for retirement due to its complexity. Today, we address the expenses for which we should plan during our senior years. Correctly assessing the income we will need is vital for planning how we should invest our retirement nest egg.
We will quickly look at six factors that should be considered in determining our senior expenses. Each factor has several sub-components. This step in the planning process is complex and should be considered carefully. Husbands and wives should approach this together. Take note, failure to suitably address future expenses may result in a disappointing future.
The first expense factor we will consider is the cost of housing. Will we be relocating when we choose to change gears in life? Will the new area call for a higher housing cost? Will we need to continue paying a mortgage? Will we choose to rent so we will be able to more easily relocate if needed or desired? How much should we plan for water and electricity, lawn maintenance, alarm system monitoring, homeowner’s insurance, property taxes, internet service, and television streaming/cable/satellite? We should also have a plan for general maintenance of roof replacement, repainting, flooring replacement, HVAC and plumbing repairs. A good place to begin is assessing our current expenses in all of these categories.
The second factor, perhaps of even greater importance, is the cost of health care. Our approach is not to calculate a total that may be spent over a 20-25 year period, but to assess the annual and monthly cash outlay required. We urge everyone to take a second look at the photo accompanying this post. Just as there is a superabundance of traps on this hole, there is an equal number of traps that can cause us to underestimate our monthly health expenses. Remember, Medicare is neither free, nor does it cover everything! Medicare Parts B and D require monthly premiums, and Medicare Advantage Plans likely require additional premiums. Also consider that Medicare does NOT cover the cost of hearing aids, dentures, eye exams or glasses, or home health services. If you have astigmatic eyes and require cataract surgery, lens implants correcting for astigmatism are not covered by Medicare. While Medicare Part D offers some financial relief for medications, it does not cover their full cost. Cancer treatments are often beyond the scope of Medicare as well. Prior to making the change to retirement, families must make their best effort to create a health care monthly budget assessment.
The third consideration to be addressed is the aggregate costs of day-to-day living. What will we spend on groceries? Are we carrying credit card balances into retirement? How much will our monthly payments be? How soon will we need to replace current clothing items? Transportation is not free. How much will we be driving and spending on gasoline, oil changes, and regular maintenance? How road worthy is our current car? Will it need significant repair in the future? When will we need to replace the tires? Will we need to replace the car itself? How long will we be able to use our current cell phone? How much will our monthly usage cost? How often will we visit local coffee shops and how much will this add to our budget? Many reports tout the benefits of pets for senior citizens. If we decide to have a pet, how much will the cost be for food (as much as $100 per month) and vet bills? What about the cost of a senior gym membership? Some are included in Medicare Advantage plans, but perhaps not in the area where we live. Haircuts are not going to disappear in retirement, but fixed incomes may make them more difficult to fund. This list can grow long, and the monthly costs quickly accumulate. Underestimating these costs can be painful.
The final three considerations are entertainment, travel, and life insurance. For the sake of space, we will not address them in detail. Each of these areas are much more discretionary in nature than the prior considerations. However, the expenses incurred can be very expensive, and often are not regular and consistent considerations. Where we choose to vacation can be a variable where funds may be saved. How much may our entertainment budget be trimmed? This can effectively reduce the pressure upon our day to day financial costs. Life insurance sometimes offers some flexibility. Would it be possible or wise to exercise the reduced paid up policy option, thereby eliminating future payments? If we are using dividend whole life insurance, will the dividends of the policy carry the policy forward? Everyone should seek qualified advice on such decisions.
Just as a golfer would consider the distance to the green, their personal ability and propensities, and the direction and speed of the wind, before attempting the shot in the accompanying photo – we need to consider carefully the many expenses that we know we will have in our senior years. The exercise we have outlined is seldom easy, never pleasant, and often avoided. Please do not avoid it. If avoided, the result will land us in a trap.