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“Retirement: Life’s Most Expensive Purchase”


As thousands transition into retirement, wouldn’t it be nice to know what the costs are going to be . . . ahead of time?

This article from ThinkAdvisor discusses a Merrill Lynch/Age Wave study that reports: the average cost of retirement is 2.5 times that of the average house!

Retirement is the most expensive purchase most people will make, yet many Americans are under-funding their retirement, according to a new study from Merrill Lynch and Age Wave.

The study, Finances in Retirement: New Challenges, New Solutions, is the capstone of a four-year, 50,000-respondent investigation into the changing lifescape of retirement and reports that retirement carries the highest average price tag compared to life’s other biggest expenses, such as buying a home, raising a child and paying for college. [Which should give folks pause about paying cash for kid’s college.]

“Retirement is life’s most expensive purchase and on average the cost of a retirement is actually many times greater than the cost of other big-ticket items as well,” Lorna Sabbia, Head of Retirement & Personal Wealth Solutions at Bank of America Merrill Lynch, said during a webcast briefing.

By comparison, the average cost of a home is $278,300, the cost of a college education is $83,400, and the cost of raising a child to age 18 is $245,300.

Despite retirement’s hefty price tag, the report finds that 81% of Americans don’t know how much they’ll need to fund their retirement. In addition, a growing number of younger generations think they’ll need to personally fund a larger portion of their retirement and therefore expect to rely less on their employers or the government.

“That three-legged stool for funding retirement – that being Social Security, employer pensions and personal savings – is becoming wobbly at best for most people,” Sabbia said.

According to Sabbia, millennials expect 65% of their retirement income to come from personal sources. Add to that the fact that longevity is increasing, and more people are going to personally be funding longer retirements, according to Ken Dychtwald, president and founder of Age Wave. ”Future generations will be funding much longer retirements than their predecessors, Dychtwald said.

Kevin Crain, head of workplace financial solutions for Bank of America Merrill Lynch, offered some advice on how advisors can use this retirement price tag to help clients save more.

“[Considering retirement] as purchasing something in your future changes the dynamic of how you plan for that number,” he said. “So you’re really trying to accumulate the assets and the ability to purchase a great future. And viewing it that way I think is a different approach to how traditionally advisors have worked with people on this subject.”

The study looks into why people aren’t saving more, and found people offer a variety of reasons for not saving for retirement.

The top two barriers that people cited in the study are not having enough money left after paying basic expenses (41%) and paying down debt (38%).

The study also finds that there is a pretty significant “intention-action gap” in how Americans are saving for retirement. It seems Americans know they should be saving more, but they fail to do so.
According to Crain, “our study found that people have good intentions.” However, the study finds there’s a big difference between people’s intentions and what they actually do. [Hmmmm. . . . kinda like New Year’s resolutions about weight loss and working out.]

On average, Americans said they think they should be saving about 25% of their disposable income each year. “And yet people are saving just one-fourth of that,” Crain explained. “Americans are actually saving 5.5% of their disposable personal income.”

The savings rate has moved up from a low of about 3% during the recent recession, but it’s still less than half the peak rate of 13% in the early 1970s, according to the study.

It’s a challenge to plan for retirement outcomes, with so many variables. And there are events that can drastically change the best laid plans. It’s why talking with an advisor regularly is important. We stand ready to have those discussions, so don’t wait until a major life event to call or come in for your ‘fiscal fitness workout’.