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Are You Underestimating Your Retirement Costs? Bad idea. You may be well on your way to a dangerous shortfall.

By Pamela Yellen Edited by Frances Dodds

Opinions expressed by Entrepreneur contributors are their own.

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As an entrepreneur, you create value for your customers and wealth for yourself and your employees. To do this, you must look at trends in your industry and anticipate future challenges that will affect your bottom line.

Related: Does Your Retirement Plan Pass the 3-Point Check-Up?

In the daily crush of running your business, have you taken the time recently to examine what your costs of living will look like when you retire? Inflation, health care and longer lifespans are all adding to the cost side of that balance sheet.

People underestimate their cost of living in retirement in three ways.

1. They assume they'll spend less in retirement than while working. The conventional wisdom that your spending will decrease after you retire doesn't square with reality for many folks who have already retired, as recent studies show. Even if we set aside for the moment the issue of medical and long-term care costs, this idea assumes you will forgo pricey pleasures such as travel, eating out, spending on grandkids and other discretionary expenses -- at the exact moment when you finally have the time and freedom to enjoy them!

Have you actually sat down and calculated how much you will need -- and want -- to spend each month to enjoy the lifestyle you want? Most people haven't, but this is a critical starting point. Be comprehensive in listing out all expenses. List everything you might spend in retirement, including expenditures such as travel, hobbies and gifts for grandchildren.

Don't forget to assign numbers for major but often unexpected costs such as car repairs, financial help for a child or major home repairs. Do you have an emergency fund that's adequate to cover these expenses? If not, now is the time to start saving.

2. They underestimate the impact of inflation. We've been the beneficiaries of historically low inflation rates in recent years. It's easy to forget that inflation has been a lot higher over the years -- in some years, it's been 10 percent or even higher. Still, even low rates of inflation eat away at the value of your savings.

If inflation averages just 3 percent per year, it will swallow more than $117,000 of the average Social Security benefit over 20 years, according to the LIMRA Secure Retirement Institute. The institute's research finds that "older Americans experience higher inflation rates than other consumers."

Related: How to Pay Zero Taxes Legally in Retirement

How can this be? They spend more on health care, which is subject to higher-than-average inflation. Price increases for personal health expenditures are expected to rise 2.2 percent this year, compared to 1.9 percent for inflation in general, according to a recent report from the Centers for Medicare and Medicaid Services (CMS).

If you're planning to live a long and fulfilling life, say 30 or more years in retirement, you also should consider long-term inflationary trends. Inflation averaged 3.22 percent a year from 1913 to 2013, so factor in at least 3 percent inflation per year -- 4 percent if you want to be on the safe side.

3. They underestimate healthcare expenses. Costs for health care and long-term care are truly the elephant in the room for today's retirees, and an area where many people significantly underestimate their expenses.

Today's retirees are feeling the impact. A new Employee Benefit Research Institute study found that 44 percent of retirees surveyed said they were facing higher healthcare costs than they expected. Healthcare spending is projected to rise by 5.3 percent in 2018 and continue near that rate through 2026, CMS estimated. That means we are only a few years away from health expenditures accounting for almost 20 percent of the economy, compared to 17.9 percent today.

A 65-year-old couple retiring now will need $280,000 to cover out-of-pocket healthcare costs (not covered by Medicare), according to a study by Fidelity. That amount keeps going up and does not even include costs for nursing home or home health care.

At least 70 percent of people over age 65 will require long-term care services, and more than 40 percent will need nursing home care, according to the U.S. Department of Health and Human Services. The typical nursing home stay costs more than $250,000, and Medicare does not cover these expenses.

If you add up these expenses and realize that what you've been saving isn't sufficient, there are some steps you can take now to help make up for a retirement savings shortfall.

Three tips to help make up for a retirement savings shortfall

1. Increase the amount you save each year by at least 1 to 2 percent. You won't feel the pinch, but you'll be surprised by how much your savings will grow.

2. When calculating how much you'll need in retirement, use the currently recommended savings withdrawal rate of 2.8 percent, and assume you'll live to at least age 95.

3. Save more where your money is guaranteed to grow every single year, even when the market is crashing. Certain kinds of specialized, dividend-paying whole life insurance meet this criteria, and some plans include benefits covering long-term care and home health care.

Related: The Basics of Self-Directed Retirement Accounts

As an entrepreneur, you've taken responsibility for creating your own business and generating the income required to stay in the black. Take action now to boost your savings and plan for all the contingencies you will face in your golden years. There's no better investment of your time if you know that it will buy you and your loved ones a secure financial future.

Pamela Yellen

Financial security expert

Pamela Yellen is a financial security expert, a two-time NY Times best-selling author and President of Bank On Yourself. Pamela's latest book is "Rescue Your Retirement: Five Wealth-Killing Traps of 401(k)s, IRAs and Roth Plans – and How to Avoid Them."

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