After writing about how the price of health care and everything else does indeed double every ten years, more or less, I knew I wanted to follow up with a few thoughts about retirement planning and how the compounded effect of normal inflation must be considered in planning for retirement.
When Social Security was first established in America the retirement age was 65 years while people lived, on average, only a couple of years longer. Now, life expectancy in America is nearing 80!
In other words, people may well see their cost of living double twice during retirement. Actually, some may experience much more since living to age 100 is not at all unusual.
Consider a very real potential. Say you retire today with $2,000/month in retirement income (many, in fact have far less—often by half). If you can live OK on that you will have to be quite frugal.
But when your costs double just twice your expenses will be $8,000 per month! Will your retirement income keep up? Unlikely.
Now suppose you are lucky enough to be one of those who live into their nineties. Double again and you have a minimum need for $16,000 every month to buy what $2,000 buys now! Scary thought, isn’t it!
It is not a question of if but of how we will cope with this pending challenge. Let me suggest a couple of ways in which our retirement planning should anticipate this need and prepare for it.
First, simply plan for a larger retirement savings plan with a corresponding larger percentage of reinvestment during retirement years. While most planners suggest that during retirement you should reinvest at least 10% of your investment output each year, perhaps it would be better to reinvest 20%.
Second, I recommend more than ever that people plan to own a paid for home before retiring. While some people argue this position, it is only logical that having a home that will not cost any more to own except for the rise in taxes and insurance after everything else doubles or quadruples will be a great benefit.
People are indeed living a lot longer. Unless retirement ages jump up dramatically, like about ten or fifteen years which is highly unlikely, we must begin to rethink our retirement needs.
For Americans traditional Social Security is on the brink of collapse. It is essential to get serious about this need. Fortunately there is a lot we can do that can make a very real, very positive difference.
