In our blog posting dated Feb. 25, 2013, we discussed the retirement savings crisis and that people need to work with their tax professional now to plan for a successful retirement rather than merely use their tax professional for tax preparation and tax planning services.
According to the Social Security Administration’s (SSA) 2010 printing of the Expenditures of the Aged Chartbook, the single largest component of expenditures in retirement is housing costs which accounts for 35.4% of retirement expenditures. Other large components were transportation (14%), out-of-pocket health care (13%), and food (12%).
We find these statistics alarming as we look into the future using our crystal ball. As future generations live longer due to medical discoveries and improved health care, will the already high cost of housing increase due to long-term care? While the aged are prone to live in their home as long as they are physically able to, as we live longer the likelihood will likely increase that the day will arrive when assisted living or a nursing home will be required. The study that was used covered only the non-institutionalized population, and therefore omitted nursing home residents and their medical expenditures. Thus whether living in a long-term care facility is considered a housing or medical cost, it was not included in the SSA’s study. Since the current cost of housing for the aged usually does not include a mortgage as the mortgage has usually been paid off, the housing cost is undoubtedly impacted by real estate taxes, repairs, heating, and other upkeep expenditures. The study also showed that those who rented incurring housing costs that could reach 46% of total expenditures. As the children leave the nest, perhaps it is time for mom and dad to consider downsizing to reduce those housing costs.
Transportation costs were directly related to owing a vehicle as public transportation accounted for only a small portion of transportation costs. It would be interesting to know if the high transportation costs were related to high repair costs related to keeping an older automobile or discretionary spending for periodically purchasing a new car.
While no surprise, the study showed that medical care increased as the person aged. Since persons who were institutionized were not included in the study, one could argue that the 13% of medical out-of-pocket expenses were understated. While many in the study were undoubtedly covered by Medicare and thus had their costs capped, one needs to ponder what impact the new Affordable Care Act (Obamacare) may have on the cost of medical care going forward.
While our crystal ball may have raised questions without a conclusive finding, the SSA’s study does provide much information about the cost of expenditures by age and income, and should give food for thought that retirement planning needs to begin as early as possible and not the year before retirement is being considered as so many retirees tend to do.
Note: Because each individual’s financial situation is different, if you want to learn more about creating a family budget, retirement planning strategies, and an evaluation to see if your retirement plan is working, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation.
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