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Divorce, death of a spouse and unexpected job loss are only a few of the life events that can thrust people’s lives into chaos, requiring major emotional, social and financial adjustments. While the road ahead may seem daunting, financial challenges can be met by understanding both your short-term needs and the long-term factors that will govern your financial wellbeing.

Getting Real About Living Costs

The first financial priority is to determine how much money you need to pay basic bills. Face it, many of the things we spend money on are boring and we pay little attention to them, but the final price tag adds up in a hurry. How much do you pay in taxes? For food? How about healthcare-related expenses?

Most people are surprised at the total, so painting an accurate picture is critical after a life-altering event. Financial planners can help determine how much you will need by walking you through the critical expenses and helping develop spending estimates. They can also update your plan as goals or circumstances change.

Even without a planner, though, you can get a solid estimate. Monthly statements from a checking account and other accounts used to pay bills provide much of the necessary information, along with purchases made with borrowed money (e.g., credit cards).

That said, be realistic about how your major life change impacts the total amount. For example, if a departed spouse spent more liberally on clothes than you did, you may be able to reduce what you budget for that expense. Conversely, if your new life requires you to be more fashion elite, you may need to budget a larger amount. Just realize that some costs may rise significantly once you are on your own (e.g., childcare).

Accounting for the the Reality of Inflation

As difficult as it can be to estimate how much money it takes to live everyday life, it is even harder to project future expenses.

Inflation can have an enormous effect over time. The Federal Reserve Board is targeting a 2% inflation rate for the economy. Over long periods, even that modest increase of prices makes a big difference. In 20 years, for each $1,000 you spend today, you would spend $1,480. Over 30 years, a 2% inflation rate would increase that total to $1,800.

Recognize, too, that a 2% rate is an average for all costs – some prices rise much faster. It is a safe bet that you will spend more on healthcare in the future. Over the last 20 years, healthcare inflation has averaged 3.6%. If healthcare costs rise 3.6% annually over the next 20 years, $1,000 of costs today would rise to more than $2,000. Over 30 years, it would raise those costs to almost $3,900. If a large proportion of your spending goes for items that are rising in price more rapidly than the average, your projections need to reflect that.

Investing the Right Amount

Just as many understate how much it takes to pay bills, most people underestimate how much they need to save to fund future living costs. Most people will have the good fortune of a long lifespan after retirement, which also means providing for living costs over a longer period of time.

To minimize the chance of running out of money, you should plan for annual cash flows that extend well beyond normal life expectancy. Planning for 30 years of required cash flows, even for someone who retires at age 65, may not be excessive given how long people often live.

That requires a lot of money. The average household earned $56,500 in 2016. Over 30 years, payments of $56,500 total $1.6 million. And if inflation raised costs only 2% per year, you would need an additional $700,000 – or a total of $2.3 million.

Most households have nowhere close to $2.3 million of assets at retirement, much less the amount that would be needed if they stop working earlier in life. You can get there, but you need to start early and stay disciplined.

Planning After the Unexpected

Traumatic life changes are never easy. While the financial adjustments are often difficult, there are at least ways to determine the amount of money that will be needed to pay essential bills.

The biggest task is simply making sure financial issues receive enough attention as you work through the other challenges a major life change presents. While it’s possible to face those challenges on your own, help is available. The financial community offers a range of services that can help you to make your future more financially secure.

About Bruce McCain

Bruce McCain is the Chief Investment Strategist for Key Private Bank, where he monitors the economy and the financial markets and serves as part of the team that formulates investment strategies for clients. He supplies frequent insights to media throughout the region and around the country. His comments and interviews have been featured in such publications as The New York Times, The Wall Street Journal, Investor’s Business Daily, and Business Week, as well as on television outlets such as CNBC and Bloomberg TV. He is also a regular source for wire services such as the Associated Press and Reuters and is a Contributor on Bruce joined a predecessor of Key in 1987, after spending six years on the business faculty of the University of Iowa’s Henry B. Tippie College of Business. Bruce earned a PhD in Business Administration from the University of California at Berkeley, and undergraduate degrees in Psychology and Accounting from Boise State University.


This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

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