Top Living Expenses Seniors Underestimate After Retirement

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Brits ‘significantly’ underestimate the cost of living in retirement

The average non-retired UK person expects living expenses to account for 38% of their annual retirement income, but those already in retirement say living expenses represented 53% of their expenditure.

When it comes to income in retirement, the study by Schroders found that UK adults aged 55 and over expect to need an income equivalent to 66% of their current salary to live comfortably in their later years.

But those already retired said they actually receive less – just 53% of their final salary. And just 52% of these retirees said this is sufficient to live comfortably. Two fifths said they could use a bit more income, while one in 10 said they don’t have enough of an income to live comfortably.

As part of the study – a survey of over 22,000 people globally, including 1,000 from the UK – non-retired people in Europe expect living expenses to account for 35% of their retirement income. But the reality is that they spend closer to 50%.

On a global basis, non-retired people expect to spend 34% on living expenses, compared to the 49% actually spent, according to retirees.

Lesley-Ann Morgan, head of retirement at Schroders, said there is a real danger that people globally are underestimating their basic living expenses and the level of income they will need to live comfortably in retirement, particularly in the current environment of low returns and increasing inflation.

“There is no magic wand for savers. To avoid facing challenging financial circumstances on retirement, they need to recognise the need to start saving as much and as early as possible.

“Leaving retirement saving until you are nearing your 50s and 60s is likely to be too late to make up a savings gap,” she said.

Top Ways to Avoid Financial Anxiety in Retirement

Updated on Apr 22 2020

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As retirement approaches, many people begin to feel anxious about the major life change. Here are top tips to help you get organized for a successful last third of your life.

Aside from growing older, people approaching retirement often become anxious thinking about leaving a lifestyle, leaving the workforce, and having enough money to cover expenses in retirement. Generally speaking, anxiety comes from fear – fear of the unknown and fear of failure. But, retirement does not have to cause anxiety.

If you take the time now to plan and ensure financial security in retirement, it can be a fun and fulfilling experience. Learn top ways to prepare for retirement today to avoid financial anxiety in the future.

5 Tips to Avoiding Anxiety in Retirement

1. Conduct a Financial Assessment

Knowing where you are going always has to start with knowing where you are. You absolutely can not start a sound retirement plan without an honest financial assessment of your current financial situation. Consider your investments, any retirement income you may receive, your debt, and your current expenses to create a holistic (and honest) account of your finances. This can help you understand your debt to income ratio and anticipate financial changes in retirement.

2. Pay Off Debt

After knowing where you are and what debt you have incurred, prioritize paying it all off before retirement. This includes credit card debt. Do not put more on your credit card than you can pay off in a month. Try to pay off any other loans, such as auto loans, mortgages, and student debt that will detract from a fixed income in retirement. The more freedom you can have with your money, the better.

3. Forecast Future Living Expenses

Create a monthly budget for your current expenses and think through how those expenses may change after retirement. This is your time to dream big! If you can get control of your spending, you can plan for a better lifestyle in retirement as you will accumulate more savings. What do you want your retirement to look like and how much will it cost to get there? Will you stay in the same house or will you rent a smaller flat in the city? Does your retirement include travel? If so, how does that change your living situation and monthly bills? These are all questions you should consider to plan for your future.

4. Have a Plan for Unexpected Costs

We can never know what the future holds but we can have an emergency fund ready to cover some or all of the costs of an unexpected expense. This includes health care and medical costs. How will you pay for long-term care or home assistance, if needed? What will Medicare cover – and what won’t it cover? Think about long-term care insurance and what’s best for you.

5. Contact a Fiduciary Financial Advisor

Enlist the help of a trusted and well-trained professional to help you work through these issues. When it comes to financial planning, it is always helpful to have another trusted set of eyes on your planning. Fiduciary financial advisors are legally bound to put your interests first, above their own. They can be a priceless resource in reducing financial anxiety in retirement and even see missed investment opportunities, spotting ways to increase income in retirement.

We all have anxiety and concerns about what our financial future holds. However, by taking an honest look at our finances and anticipating change while working with a trusted financial advisor, anxiety can be relieved. Fears can be rested and retirement can be enjoyed!

More than half of clients underestimate their retirement expenses

Underestimating certain key factors in financial planning can leave retirees in difficult circumstances at a time that is supposed to be their golden years.

According to an AICPA survey, many people planning for retirement make the mistake of underestimating these factors. CPA financial planners responding to the AICPA CPA Personal Financial Planning Trends Survey for the third quarter of 2020 said that, on average, more than half of their retirement planning clients underestimated:

  • Their retirement expenses (57%),
  • Their and their spouse’s combined life expectancies (57%),
  • Their individual life expectancies (52%), and
  • The amount of money they need to be able to retire (54%).

Survey respondents most frequently named overspending as a key reason clients were forced to change their retirement plans (76% named it as one of the top five reasons), followed by health care costs (72%) and poor estimates of retirement spending and income (68%).

Clients were more likely to reduce spending before taking steps to increase their retirement income, planners said. The strategies the highest percentage of clients would use to reduce spending included reducing gifting (planners said 56% of clients would consider this option), reducing discretionary spending (54%), and reducing travel (52%).

The greatest percentage of clients would be willing to sell physical assets for cash as a way of increasing retirement income or cash flow, planners said. Thirty-five percent of clients would consider this strategy, while 37% would consider changing the allocation of their investments for additional income, even if doing so would increase the risk of running out of money earlier.

Planners also stated that almost three in 10 clients (29%) would refuse to change their spending habits unless they were forced to. About the same proportion (30%) would refuse to adjust their cash flow or income unless circumstances required it.

Forty percent of respondents chose a change in health status as the circumstance most likely to make clients receptive to changing their retirement plan. Thirty-two percent of respondents chose losing a job or income as the event most likely to persuade clients to alter their plans, while 14% chose having a conversation with an adviser.

The survey polled CPA financial planners in September and received 398 responses. The survey asked advisers about their clients’ reactions to recent turbulence in the stock market. Just 16% of clients asked about withdrawing their funds from the market, planners said. Clients who had established relationships with CPA financial planners showed the most confidence during recent stock market volatility (scoring a 3.6 on a 1-to-5 scale, with a 1 indicating the least confidence and a 5 indicating the greatest confidence), followed by clients under 40 (3.5) and those who were educated about the market (3.4).

Newly retired clients were most anxious about the recent stock market fluctuations (2.3). Clients approaching retirement (2.4), clients who had little interest in or were least educated about investing (2.4), and newer clients (2.5) were also more apprehensive. The data suggest that working with a CPA financial planner can ease clients’ fears about investing.

To increase clients’ confidence about investing, CPA financial planners who hold the PFS credential recommend that advisers:

  • Help clients create disciplined investing plans,
  • Educate clients about the factors that cause volatility, and
  • Remind clients that stock market returns should be evaluated in terms of three-to-five-year cycles, not quarterly returns.
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