How Will Your Expenses Change in Retirement?
Estimating expenses over the duration of one’s retirement is a fundamental part of retirement planning. Yet, there’s surprisingly little agreement among financial planners about spending behaviors. Some suggest that retirement spending rises as clients age, due to accumulating health care expenses. Others suggest that expenditures decrease as retirees reduce their spending in areas such as travel and entertainment. Still, others suggest that retirement spending stays relatively level and simply keeps pace with inflation.
The long-term impact of inflation is a fundamental risk for retirees. Yet most individuals never adjust their portfolio withdrawals each year for inflation. Instead, the checking account bears the brunt of inflation which means funds need to be replenished. To determine how much inflation you are experiencing, you must look at changes in the checking/savings account balances over time, preferably over one year.
A recent article by Wade Pfau, Director of the Macroeconomic Policy Program at the National Graduate Institute for Policy Studies, Tokyo, Japan, examined the question of, “How do spending needs evolve during retirement?” It concludes that most people’s spending patterns change over the course of retirement. Expenses look very different at age 90 than at age 65.
He cites a paper by Californian Lutheran University professor Somnath Basu, “Age Banding: A Model for Planning Retirement Needs,” which discussed post-retirement spending patterns. Basu considered a 30-year retirement divided into three 10-year intervals. Rather than assuming a constant rate of inflation for expenses in retirement, he divides spending into four general categories: taxes, basic needs, health care, and leisure. Within these categories, he investigated the spending patterns by age and made allowances for differential inflation rates among these categories.
For example, he noted that retirees spend more on leisure (7 percent inflation rate) in the early part of retirement and more on health care later. Health care expenses, which had an inflation rate of 7 percent, were adjusted upward by 15 percent at age 65, 20 percent at 75, and 25 percent at 85. Taxes and basic living expenses were assigned an inflation rate of 3 percent, and 7 percent for health care and leisure.
This methodology provides a useful tool for planning long-term retirement budgets. Having a system to track your expenses is a must. Make it a habit each year to review where your money is going and what increased and decreased.
Your expenses will change during retirement.
Archer Investment Management
Archer Investment Management is focused on the enhancement of your life, whether that be helping you to pursue your passions, developing a better plan for your financial future, or developing a better benefit package for your business. The protection of the things you value is our first priority. You work hard for what you have, and we want to help you preserve that. Our passion is educating our relationships about the financial markets, business strategies, and investment opportunities.
Founded in 2005 on the desire to provide unbiased advice and unparalleled customer service, Archer Investment Management works with families and businesses all over the country. Located in one of the best and fastest growing cities in the country, Raleigh, North Carolina, the firm has been positioned for tremendous growth and opportunity. The firm's dedication to the community is what lead the Triangle Business Journal to identify Matt Archer, Founder and Managing Partner, as one of the 2011 "40 Under 40 Leadership Award" recipients. Each member of the company has a burning desire to help you enhance your life, protect what you value, and educate you on the opportunities available.
Matt Archer – Founder & Managing Partner, Investment Advisor Representative
With a solid background in the financial industry, Matt Archer founded Archer Investment Management in January of 2006. Matt finds working as an Independent Advisor Representative rewarding because it allows him to help clients make their financial goals and dreams a reality, thus helping them attain financial freedom in their lives.
A graduate of Brockport State University, Matt has a Bachelor of Science degree in both finance and economics; he also has several industry licenses including his FINRA General Securities Representative (Series 7), NASAA-Investment Advisors State Law Exam (Series 66), Uniform Securities Agent State Law Exam (Series 63), General Securities Principal (Series 24) as well as his Life and Health Insurance licenses, and Medicare Supplements and Long Term Care Insurance licenses.
Nina O’Neal – Partner, Investment Advisor
Nina O’Neal’s experience with companies both large and small brought her to Archer Investment Management in November of 2009. Nina enjoys educating both employees and employers on the benefits available to them as well as how they work for each individual.
A graduate from the University of North Carolina at Chapel Hill, Nina has a Bachelors Degree in Fine Arts. She also has several industry licenses including the General Securities Representative (Series 7), NASAA-Investment Advisors State Law Exam (Series 66), Life and Health Insurance, and Medicare Supplement and Long Term Care Insurance licenses. Nina began her career in the financial industry in New York, NY. Her interest in the financial markets inspired her to pursue an opportunity with an institutional investment firm, Jennison Associates. While at Jennison Associates, Nina served as the liaison between the clients and the firm. After three years in New York City, Nina moved back to North Carolina to join Merrill Lynch as a Financial Advisor. Since that time, she has focused on bringing her experience with large pensions, endowments, and corporations both to individuals and to businesses.
Capital Guardian, LLC
Capital Guardian, LLC is a full service wealth management firm with locations across the United States. Capital Guardian, LLC helps talented financial advisors service their clients by providing infrastructure, technology, systems, advice, and support.
Capital Guardian, LLC, exists to help financial advisors serve their clients, and only their clients. Good advisors know that their long-term success depends upon the success and satisfaction of their clients. Capital Guardian provides their advisors all of the tools necessary to match their client’s needs and goals with their investment philosophy.
Not only is Capital Guardian a client-focused firm, they’re also able to provide you with investment opportunities that you may not have elsewhere. They have an “Open Platform”. For example, you’ll have the flexibility of choosing from more than 600 mutual fund companies, 500 separately managed accounts and a long list of fixed and variable annuities. They are also advocates of alternative investments. You can achieve true diversification by investing in asset categories beyond the stock market - like managed futures, hedge funds, private equity, REIT’s and other alternative asset classes. We also partner with credible counterparties to create attractive structured notes and equity linked CDs.
Put simply, investors choose Capital Guardian because they want unbiased advice and a multitude of products and services available for their portfolios.
Capital Guardian, LLC partners with Pershing, LLC, the leader in global clearing services and the largest custodian based on their list of broker dealer customers. Pershing is part of The Bank of New York Mellon Corporation, which has in excess of $20 trillion in assets under custody and administration and more than 40,000 employees in 34 countries on six continents. You should have peace of mind, knowing your Capital Guardian advisor is supported by a worldwide network of financial professionals and the most respected custodian on Wall Street. Recently, Pershing was rated #1 for Customer Statements by DALBAR, Inc., the nation’s leading financial services market research firm.
If we can be of any assistance, please call Archer Investment Management at (919)758-8911. We will be happy to work with you.
The above material was prepared by Peak Advisor Alliance.