Everybody knows one. That friend you always have to wait for. At a restaurant, he will text you that it will just be five more minutes. Another text ten minutes later says, “Five more minutes.” You’re about to leave and you get another text: “I’m on my way.”
It’s possible that he’s busier than average, but more likely than not, he’s a chronic under-estimator. Maybe it’s just good-natured wishful thinking, hoping he can be there sooner than possible. But in my book, inaccurate is inaccurate.
Now not being able to calculate the time it takes to drive across town is one thing, but not being able to calculate the expenses you’ll need for retirement is another. Here are two ways people underestimate for retirement, and two reasons a financial planner might not be a bad idea.
We underestimate how long we’ll live
A Stanford study[1] found that 2 in 3 men, and 1 in 2 women underestimate their potential lifespan. For those who are still working now, especially, it may be cute to say, “I’ll live to be seventy if I’m lucky,” but the odds are you’re just wrong. On toward 2050, some experts estimate our life span to reach the late eighties—and that’s the average. And even if you think a few more years of life are just a drop in the bucket, each of those drops is expensive.
We underestimate how much we’ll need
Just because medical advancements are extending our lifespans doesn’t mean healthcare costs are going down—quite the opposite. The average retiree can expect to spend an average of $240,000 in medical costs,[2] and that figure doesn’t include long-term care costs, which, if not planned for, can decimate savings. And if you’re planning on Medicare to take care of most of that, this may be another example of underestimating the reality. Medicare, on average, will only take care of about 60% of total medical costs[3]. This is where your savings comes in.
And what about the fun stuff? Your retirement isn’t (like so many people assume) a time where your spending goes down. Over the first ten years or so of retirement, almost all of my clients experience an increase in spending. Why? Because they’re enjoying their lives more. This point is crucial to avoid underestimating your expenses.
One of the great things about a financial planner is that they’re less likely to under- or over-estimate your funds and your situation. If you’re not sure where you stand, or if your plan needs a more objective perspective, feel free to call us today.
[1] “Underestimating Years in Retirement.” Stanford.edu. Stanford Center On Longevity. Aug. 2012. Web. 17 Aug 2015.
[2] Hamilton, Martha B. “What Retirement Will Cost You.” AARP.org. American Association of Retired Persons. January, 2013. AARP Print Edition. 17 Aug. 2015.
[3] Fronstin, Paul. Dallas Salisbury and Jack VanDerhei. “Savings Needed for Health Expenses for People Eligible for Medicare: Some Rare Good News.” EBRI.org. Employee Benefits Research Institute. Oct. 2012. EBRI Notes. 17.Aug. 2015.