Real Cost of Retirement
Then there are local businesses to support, like weekend trips to Napa Valley, the latest iPhone, and let's not forget about that Stanford college fund for little Jimmy (is he in eighth grade already?). It's no surprise so many people have trouble saving for retirement. According to the latest consumer finance study from the Economic Policy Institute the median retirement savings for all US working age families was $5,000, with most having little to no retirement savings at all. That's scary.
Life in the San Francisco Bay Area is something special. We're fortunate to live in one of the most diverse, affluent, and forward-thinking places in the world. But paradise has a price and in the Bay that price comes at a premium. By one measure San Francisco is the most expensive place to live in the country. According to Huffington Post the median home price in the city is over $1.2 million. After a down payment of $240,000, a buyer would still need an annual salary of $179,643 just to qualify for the mortgage. That makes less than 1% of the homes affordable for median income earners.
Maybe we're better than median in the Bay (being all forward-thinking), but that's expected since our cost of living is higher. Regardless of how much we have saved, the real question is are we doing enough? Many people simply don't know the answer to that question. Part of the problem is the cost of retirement grows exponentially (due to compounding), and humans are notoriously bad at understanding that. Consider the following example.
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Imagine you're 40 years old and planning to retire in 25 years
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You think you and your spouse will spend $5,000 a month
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$5,000 a month is $60,000 a year
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Assuming you live until age 85 that's $1,200,000 in retirement spending
Maybe you haven't set aside much for retirement because of mortgages, student loans, the kids -- it's always something. But you have another 25 years to accumulate $1,200,000 -- so no biggie right? Except that's nowhere close to enough. We need to account for inflation which raises prices for everything. Think about it, in 1975 the average price for a gallon of gasoline was only 59 cents. We pay over $3 in the Bay for the same gallon today (a rise of over 500%). Nobody knows what inflation will be in the future, but we do know the long-term average is around 4% per year (as measured by the Consumer Price Index shown below).
If we assume 3% annual inflation $60,000 per year inflates to $121,968 after 25 years. Now inflate that by 3% for 20 years in retirement and we come to $3,375,636 -- that's the total inflation-adjusted amount of retirement spending needed. The math is shown in the table below.
Keep in mind we're talking about $5,000 a month gross, or before taxes. Still no biggie? Then consider 3% inflation could be conservative. Expenses like medical care have inflated faster than CPI, and also tend to be larger expenses in retirement. PriceWaterhouseCoopers sees medical costs rising 6.5% a year. What if inflation is even higher? What if you live longer than 85 years? What if $5,000 a month is not enough? Retirement expenses of $10,000 a month inflate total spending to $6,751,272!
The reality is many Americans are woefully unprepared for retirement and may not even know it. That's especially true in the Bay Area where the cost of living is especially high. Have you done enough? Are you really sure? If not it's time to take action. Starting yesterday may have been best, but today is still better than tomorrow. Not sure where to begin? Then get help, even world champions work with coaches and trainers.
Let the experts at Bellwether Capital Management LLC help you get started with a complimentary financial review. You'll consult with a local, knowledgeable, and experienced investment adviser who will answer your questions and get you moving in the right direction. There's no cost or obligation, but the number of free reviews are limited, so enter your information below to reserve yours today.
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