People transitioning into retirement are having to make decisions on Social Security benefits as well as make projections on spending. In 2010, nearly 43% of all Social Security recipients were pulling benefits early at age 62 and 58% pulling before FRA. This percentage has been on a steady increase; which is not a good sign. A classic retirement planning mistake is made when the higher (married) wage earner decides to pull benefits early without examining the full financial consequence of this irrevocable decision before jumping at the money. The decision to claim Social Security benefits today is not the obvious decision it was for our parents nor should it be looked at as an insignificant or unimportant decision. There are many more factors that should be analyzed; longevity being the most important. A second issue where I see pre-retirees and new retirees placing themselves at risk is the absence of incorporating healthcare expenditures in their spending budgets. Healthcare costs are rising at a faster clip than inflation and people are living longer facing and requiring a host of medical and care expenses. Far too many new retirees are including only their Medicare premium when estimating their monthly income needs; leaving out the bigger costs of out-of-pocket annual expenditures. For those not lucky enough to have an employer retiree health care coverage, the true cost of age-related health care goes far beyond government entitlements. Medicare only covers about 50% of the typical senior’s health care costs and doesn’t reimburse for many of the common annual health-related expenses such as hearing aids, eyeglasses, dental work, and long term care. The current Administration is stripping down the tax deductions on the expenses to force more people to shoulder the burden on their own.
When this extra needed income is not planned for (or saved for) in advance, nor included in the retiree’s annual spending budget, the retiree could find themselves depleting their retirement capital assets much faster than they thought. A study on healthcare costs released in 2012 showed that a couple age 65, without the benefit of retired employee health care coverage, having a life expectancy of 80 (15 yrs) will need around $240,000 to pay for medical expenses throughout their retirement years. This projected figure includes Medicare premiums, current out of pocket co-pays, deductibles, eye exams and prescriptions. Again, this projection does not include dental and long term care expenses.
When projecting spending budgets during the initial years of retirement, an individual should consider allocating approximately $6,500 per year on uncovered general health expenses. At a time of heightened nervousness that typically surrounds retirement coordinated and future-focused financial planning is coming into its own and is integral to Baby Boomer’s peace of mind and financial survival.
www.socialsecurity.gov/policy, Fidelity Investments May 2012
