Retirement Myth #1:
My cost of everyday living and leisure spending will be less in retirement.
When helping federal employees plan for retirement, one of the most common concerns we see is the desire to be debt free before retirement. The goal is to have one’s house, car, credit cards, and other substantial debt paid off before retirement. This supports the common theory that being debt free allows one to spend less in retirement. While being debt free is a great place to start, what about unknown expenses? Listed below are a few examples of unplanned costs in retirement.
- Children and/or grandchildren – Some federal hires—such as Special Provisions employees—are eligible to retire as early as age 50. Due to this young age, many retirees find themselves paying for children’s college education or grandchildren’s living expenses.
- Federal Employee Group Life Insurance (FEGLI) – Many federal employees do not plan for the increasing cost of FEGLI coverage in retirement. More information on the increasing costs of FEGLI in retirement can be found here.
- Federal Employee Health Benefits (FEHB) – In 2020, average total FEHB premiums increased by 4% while federal retirees received only a 1.6% COLA on their annuity. Also, federal employees pay their portion of healthcare costs with before-tax dollars, but federal retirees pay their portion with after-tax dollars.
- Travel – After years of delaying trips due to work obligations, getting out and seeing the world is a desire of many federal retirees. It is common for them to want to enjoy traveling in retirement, from RV or tent camping to treks around the world; however, an increase in excursions also means a rise in travel expenses.
- Inflation – One of the greatest attributes to your federal pension is that it generally receives Cost of Living Adjustments (COLAs). As a CSRS retiree, you will begin receiving COLAs immediately in retirement, whereas a FERS retiree will begin receiving COLAs at age 62. One of the most common retirement myths is that the impact of inflation will be eradicated by COLAs. With the help of COLAs, the impact of inflation is reduced, but rarely is it totally eliminated.
When planning how much to spend in retirement, it’s important to evaluate your current lifestyle. Are you currently living below your means and allotting a sizable amount to savings every pay period? If so, you might expect your retirement income to cover most or even all your base expenses. Or, are you currently spending most of your salary every month? The answer to these questions will help guide you in the direction you need to go to plan for retirement, but don’t just blindly embrace the retirement myth that once you’ve retired your spending will decrease.
A wise consumer would begin planning now for the known and unexpected expenses applicable in retirement.