By: Dividend Sensei
So far in this series on risk management I’ve explained two key principles to avoiding costly investment mistakes:
In this next article I believe it’s important to discuss one of the most important aspects to successful long-term wealth creation. That would be understand your true long-term goals. That requires knowing three key things about yourself. First what are you investing for and thus the realistic expenses you’re likely looking at. If you are saving up for a retirement nest egg, which is the primary reason that most people invest in the stock market, well that can be a complex question. One that depends on lots of variables, including unknowable factors such as how long you’ll live and how healthy you’ll be.
But we can use some broad averages to approximate this too. For example according to the Bureau of Labor Statistics the average senior spent $46,000 in 2017 during retirement. That would mean $92,000 per year for a married couple. That might seem rather high given that a common rule of thumb is that you’ll need to replace 80% of your pre-retirement income with social security and personal savings. But here’s why retirement costs can be so high. According to HealthView Services, a cost projection software provider, the average 65 year old man and woman, can be expected to incur out of pocket healthcare expenses of $189,687 and $214,565, respectively. That comes to $404,252 per couple over the course of an average 18 year retirement, (according to the US Census Bureau).
In other words during the average retirement most couples incur about $22,500 per year in out of pocket medical expenses not covered by Medicare. That’s about 25% of your total expenses which makes sense given that healthcare costs have been rising at about double the average rate of inflation for 30 years. In addition 70% of all retirees eventually need assisted living facilities which can run as much as $120K per year, (avg length of stay 20 months).