These essential life issues go beyond what, where, and how much to invest. Issues include adding up all of your income streams, understanding the importance of saving and the impact of inflation, creating a budget, estimating your future expenses, determining when to start taking social security payments, and whether you want to work part-time.
- Housing costs in the U.S. are the most expensive line item for retirees, even more than health care.
- An average annual 2% inflation rate, for example, means that you’ll need nearly $149,000 in 20 years just to equal the buying power of $100,000 today.
- Don’t expect Social Security payments to be your predominant income source. That’s why it’s called supplemental Social Security income.
1. Add Your Income from All Sources
Although perhaps years or decades away, a great place to start thinking about retirement is to calculate how much current and future income to expect. You may have more sources than you know. These may include:
DIVIDEND-PAYING STOCKS — If you own dividend-paying stocks of great business, you can withdraw money during retirement.
PART-TIME WORK — Some people prefer to work during their retirement years. Others need to work for the income.
REAL ESTATE — For some investors, rental income from owning apartments or single-family homes is a steady source of income. Even better if you own your own home (or homes)—and have no mortgage payments.
RETIREMENT ACCOUNTS — Tax-advantaged retirement plans such as 401(k), 403(b), and Roth IRAs are a primary retirement income source for many.
SOCIAL SECURITY — And finally, you (and your spouse) are likely to receive automatic monthly Social Security deposits. Don’t expect it to be your predominant income source. That’s why it’s called supplemental Social Security income. Check here to figure out your potential social security benefits.
2. Understand the Importance of Saving Early and Often
If you don’t save, you likely don’t retire. Plus, you may not have funds for an emergency, like paying for a broken tooth or a broken transmission. With discipline, start investing young—the payoff may be substantial.
The Early Bird Wins the Retirement Prize
The table below shows the power of long-term compounding over decades. For example, Frugal Fran started when she was 25. She began with $2,500 and added $2,500 each year for 45 years. By contrast, Spendthrift Sam waited 10 years. He began at 35 with $5,000 and added $5,000 yearly (twice as much as Fran) for 35 years. Each example assumes 6% annual growth, compounded monthly, and retirement at age 70.
|Frugal Fran||Spendthrift Sam|
|Age Started Investing||25||35|
|Total at Age 70||$1,190,992||$658,716|
This hypothetical example does not reflect the actual performance of an investment. Assumes all earnings are reinvested and excludes taxes and fees.
3. Create a Retirement Budget
According to the Bureau of Labor Statistics (BLS), the typical household in 2020 headed by a 65- to 75-year-old spent an average of $49,000 per year. That’s slightly more than $4,000 monthly. Retirees spent about 20% less than the American average for non-retirees.
But what about you? You are likely not an average American. What should you include in your budget for retirement? The biggest line items according to the BLS are outlined below. Your costs and priorities may vary.
ENTERTAINMENT — Having fun, hobbies, pets, and going to sports games, theater, and museums is for every age. Individuals aged 65-75 spent nearly $2,500 on average annually
FOOD — — A two-person household each between 65-75 years old spent approximately $500 per month on food. People over 75 spent somewhat less monthly.
HOUSING — Housing costs in the U.S. are the most expensive line item for retirees, even more than healthcare. Households aged 65 and up spent an average of about $17,000 yearly on housing-related costs.
TRAVEL — Many retirees want a retirement focused on traveling and being with children, grandchildren, friends, and various entertainments. The 65-75 age group spent an average of about $7,000 annually on transportation, or $600 monthly. Their elders, people 75 and older spent less, at about $5,000 yearly.
U.S. housing costs are the most expensive line item for retires, even more than health care.
4. Estimate Future Health Care Costs
One of your biggest expenses in retirement will be for health care. How to account for this? According to a 2021 T. Rowe Price’s Retirement Savings and Spending study, the three most pressing costs for seniors were how to pay for long-term care, health insurance premiums, and emergency health care.
Long-term health care costs can be high. While costs will of course vary, the average cost for in-home health care was nearly $62,000 in 2022. A private room nursing home room cost approximately $100,000 nationally on average. (Source: Genworth Cost of Care Survey.)
A Health Savings Account (HSA) can also help you decrease health care costs. With HSAs, your money grows tax-deferred and withdrawals are generally tax-free. You can use your HSA money to pay for deductibles, copayments, coinsurance, and deductibles. Contribution limits for 2023 are up to $7,750 for family coverage, less for individual accounts.
5. Decide When to Claim Social Security Benefits
You can get your Social Security retirement benefits when you reach 62. Note that your monthly retirement benefit will be bigger if you delay your start date, and that retirement will likely last longer than you expect. See this for help in deciding when to get your Social Security benefits.
6. Understand the Impact of Inflation
Inflation is a real-life issue, not a theoretical economic discussion point. The rising cost of living may have a critical—and negative—impact on your retirement plans. Over time, inflation makes things more costly, retirement expenses included.
How inflation deflates the purchasing power of $100,000
An average annual 2% inflation rate, for example, means that you’ll need nearly $149,000 in 20 years just to equal the buying power of $100,000 today. And today’s inflation rate is much more than 2%.
|– ANNUAL INFLATION –|
|Years Away||– $ Needed to Equal $100,000 Today –|
This hypothetical example does not reflect the actual performance of an investment. Source: Consumer Price Index.
7. Consider Part-Time Work During Retirement
Some people continue to work, or do voluntary activities, after retirement from their full-time profession. Some do it for the money, or for the health benefits, for the sense of purpose work provides, or friendship and mentoring opportunities.
If you do decide to work while retired and are at full retirement age or older, you may keep all of your social security benefits. This is the case no matter how much you earn. If you’re younger than full retirement age, you’re limited in how much you can earn and still receive full Social Security benefits.
An average annual 2% inflation rate, for example, means that you’ll need nearly $149,000 in 20 years just to equal the buying power of $100,000 today.
At Lawson Kroeker, we spend a significant amount of time thinking about our clients’ future goals, their financial plans and our role in helping them get to where they want to be. We know our clients have many retirement planning and wealth transfer options available. We also understand sometimes life happens and that you need your resources at hand in case of an emergency.
It is important to take all of these considerations into account when thinking about how to grow your money for retirement. We construct a custom retirement plan just for you.
About Lawson Kroeker
Lawson Kroeker Investment Management, founded in Omaha, Nebraska is a third-generation wealth management firm that helps a select group of high-net-worth clients achieve their life goals by providing investment advice and building custom investment solutions.
Lawson Kroeker provides a broad, thoughtful, prudent, and ongoing financial roadmap tailored to each client. We focus on and understand each client’s risk tolerance and needs—whether growth, capital preservation, tax mitigation, or special situations. We also help clients with trust and estate management and philanthropy services.
Adam Yale, Partner and Portfolio Manager—Mr. Yale started his investment career in 1997 with First Manhattan Co., an investment advisory firm in New York, NY as an analyst of publicly-traded real estate securities and direct real estate investments. From 2006 until the 2022 merger with Lawson Kroeker, Adam was the sole Principal at Red Cedar Capital, LLC, a Registered Investment Advisory firm he founded that employed a fundamentals-based investing strategy. He earned a B.A from the University of Michigan and a Master’s in Accountancy from the University of Denver.
Bruce Van Kooten, CFA®, Partner and Portfolio Manager—Mr. Van Kooten has been a Lawson Kroeker Partner and Portfolio Manager since 2006 and has more than 45 years of institutional and private investment management experience. Bruce has worked as a trust investment officer with First National Bank of Omaha and as a senior investment portfolio manager in Denver at KPM Investment Management, which became Wells Fargo Private Asset Management. Bruce earned the Chartered Financial Analyst (CFA®) designation in 1987 and is a member of the CFA® Society of Nebraska. He has a Bachelor of Science degree in Business and Economics from Iowa State University.
Chad Clauser, CFA®, Partner and Portfolio Manager—Mr. Clauser began his investment career as a senior analyst at an Omaha-based investment advisor Tributary Capital Management, and later as vice president of the New York investment bank Credit Suisse. He earned the Chartered Financial Analyst (CFA®) designation in 2009 and is a member of the CFA® Society of Nebraska. Chad attended the University of Nebraska in Lincoln, where he received a bachelor’s in Finance and completed minors in both computer science and mathematics.
Tom Sudyka, Jr. CFA®, Partner and Portfolio Manager—Mr. Sudyka began his career as a portfolio manager with several large Midwest-based investment management companies. He served as a managing director and founding partner of BPI Global Asset Management before joining Lawson Kroeker in 1999. His investment decisions are guided by his 30+ years of investment management experience. He has an M.B.A. in Finance from the University of Nebraska and a B.A. in Finance from Creighton University.
Articles in This Series
PART 1: The 10 Questions to Ask When Planning for Retirement (click here)
PART 2: Retirement Planning: 7 Essential Life Issues to Consider (this article)
PART 3: Building Wealth for Retirement: Strategies for Financial Security