Newspaper article St Louis Post-Dispatch (MO)

Gallagher: Can You Afford to Retire?

Newspaper article St Louis Post-Dispatch (MO)

Gallagher: Can You Afford to Retire?

Article excerpt

Fellow geezers: As we approach that lovely day when we can tell the boss to go jump in a lake and begin our life of laziness collecting checks from the government, we are nonetheless troubled by a nagging question:

Will we go broke before we croak?

Can we survive on our Social Security and retirement savings as long as we need to? To answer that, we must first get a handle on how much we will spend when retired. And here it's easy to go wrong.

The Government Accountability Office, which works for Congress, recently rounded up estimates from private retirement planning sources and academic studies. The majority felt that a retiree needs 70 to 85 percent of his pre-retirement income to keep up his lifestyle.

That's pretty much the rule of thumb in retirement planning. The problem is that it works for people who are fairly well off but not for a lot of others.

If you're on the bottom half of the income heap, your spending won't drop by much when you retire. You're living on a slim budget as it is. If you're eating hamburger now, you won't want to live on beans in your old age.

A study by Aon Hewitt, quoted by the GAO, found that workers earning under $30,000 per year would need 98 percent of their former income in retirement to avoid that bean diet.

By contrast, someone earning $90,000 per year would be happy with just 79 percent of that in retirement.

Part of the difference lies in taxes. Retirement brings an income tax cut for the well-off, since they are no longer earning wages. The guy on the bottom of the ladder probably wasn't paying income taxes anyway, so he gets no benefit. (Social Security payments are tax-free for low-income people, and no one pays taxes on more than 85 percent of the benefit.)

The well-off were also saving part of their paychecks while working. In retirement, they don't miss the money they weren't spending previously.

In working out a retirement budget, expect some surprises. The big one is health care, and it's often overlooked.

"Oh, it shocks!" said Michele Clark, a certified financial planner who works on an hourly rate (which avoids conflicts of interest in investment advice).

Figure that health care will cost $6,000 out of pocket per year, per person in retirement, she says. She bases that on the standard monthly charges for Medicare doctor and drug coverage, along with the cost of Medigap Plan F, which provides pretty good coverage for the holes in Medicare. She also includes some eyeglass and dental expenses.

You can cut that expense by choosing a cheap Medicare Advantage plan that limits your choice of doctors and hospitals, or by choosing a cheaper Medigap plan with less coverage.

Inflation is another problem, and it surprises people. Your Social Security check will go up with the consumer price index. But your pension, if you have one, may not.

"The problem is that Social Security inflation is super low, while health care inflation is high," says Clark, of Clark Hourly Financial Planning in Chesterfield. …

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