Are you ready for retirement? If you have saved and are feeling confident, we have some numbers that might change your mind. Financial advisors Tony Drake, CFP® and Brad Allen share some retirement stats that might surprise you and how you can protect yourself from becoming a statistic.
Fact #1: One in three Americans has nothing saved for retirement.
Workers either don’t want to reduce their take-home pay or aren’t making it a priority to set money aside for retirement. There is no magic number; the amount each person will need for retirement is highly personal.
Solution: Among workers who are offered an employer-sponsored savings account like a 401(k), 75% of women and 79% of men say they are contributing to the plan. Employer-sponsored plans are a great savings vehicle, especially if you are offered a company match. You can contribute up to $18,500 to a 401(k) in 2018. If you’re 50 or older, you can contribute an additional $6,000. If you are able to max out your 401(k), consider opening an IRA or a Roth IRA to save even more. Almost anyone who earns a taxable income and is under age 70 ½ can open an IRA. For homemakers or those who do not work outside the home, as long as you and your spouse file a joint tax return, you can also open an IRA. The maximum amount you can contribute to an IRA this year is $5,500. If you’re 50 or older, the contribution limit goes up to $6,500.
Like I said, there is no magic retirement savings number, but there are some savings guidelines we can follow:
- At age 30, you should have the equivalent of your annual salary in your savings. This includes your contributions to a 401(k), any company matching dollars, IRA contributions, investments and cash in your savings accounts.
- By the time you hit 35, you should have twice your salary saved.
- At age 40, that jumps to three times your annual salary in retirement savings.
- When you’re 45, you should have four times your annual salary saved.
- This savings rate continues every five years.
- By the time you retire, the goal is to have ten times your final salary saved.
Of course, the closer you get to retirement, the more important it is to meet with a financial professional to make sure you are on track.
Fact #2: Americans are living longer and their retirement plan needs to factor in longevity.
The life expectancy for both men and women has increased more than 10% since 2010. And women are living even longer than men. About 80% of married women will outlive their husbands. Your retirement plan needs to reflect your expected longevity.
Solution: 60% of baby boomers today say they are more worried about running out of money than dying! No one wants to estimate their life expectancy, but it’s important to take this into account for proper planning. Online calculators can help estimate your longevity, but in reality, there are a lot of factors to consider – your current age, gender, health and family history, just to name a few. You can help mitigate some of the longevity risk to your portfolio with proper planning:
- Budget Your Expenses – Retirees are living on a fixed income. It’s important to write down every expense for the month so you know how much money you are spending.
- Continue Working – The longer you work, the less likely it is you will have to dip into your nest egg. Even part-time work for people in their 60s can make a big difference in how much you are saving and spending.
- Consider an Annuity – There are two different types of annuities, deferred and immediate. Within these two types, annuities can also be fixed or variable. When used properly, an annuity can provide a guaranteed lifetime income even during market downturns. Consult your financial professional to determine which type is best for you.
Fact #3: More than 80% of pre-retirees have not even tried to guess how much healthcare will cost them in retirement.
Health truly equals wealth for those in retirement. A 65-year-old couple retiring today will spend an average $275,000 out of pocket on healthcare costs. Medicare is designed to cover many of your healthcare costs, but it doesn’t cover everything. It’s estimated that Medicare only covers about 50-60% of retirees’ healthcare needs, and premiums and out-of-pocket expenses go up over time.
Solution: With rising healthcare costs, it’s critical you factor these expenses into your retirement plan. There are a few things you can do to cut down on these costs:
- Save in a HSA – Health Savings Accounts offer a tax-advantaged way to save money for qualifying healthcare expenses. While many people contribute to a HSA to fund current healthcare costs, the balance can carry over each year and can be invested to grow for the future. If you contribute $100 each month to your HSA for 20 years, you can turn $24,000 into more than $56,000, assuming an 8% rate of return. An HSA is a great retirement savings tool because you can withdraw money tax-free for qualifying medical expenses. After age 65, if you need to take money out for another reason, it will be taxed but you will not pay a 20% penalty. HSAs do not have required minimum distributions at age 70 ½, so you can let the money grow in your account until you need it.
- Plan for Long-Term Care – 70% of 65-year-olds will require some form of long-term care later in life. Long-term care expenses, and the need for long-term care insurance, will vary from person to person. The average cost of a private room at a nursing home is more than $92,000, with the average stay being 2 ½ years. An insurance policy or an annuity rider can help fund long-term care needs. Discuss your wishes with your spouse and family members now. Sit down with your financial professional to determine if long-term care insurance is right for you.
Fact #4: More than half of baby boomers admit to knowing very little about Social Security benefits.
This could be why most people start taking their benefits at age 62, the earliest age possible. Taking benefits early might not be best for everyone. If you tap into Social Security before full retirement age (66 or 67 depending on what year you were born), your benefit is permanently reduced. If baby boomers can hold off claiming Social Security until age 70, their monthly benefit can increase by 32%.
Solution: Social Security is complicated, which is why it’s important to have a strategy for collecting your benefits. Educate yourself on the best age to tap into Social Security. There are a few reasons people decide to take benefits early; they could be out of the workforce already, or working a physically demanding job. They also might not expect to live past age 75. Whatever the reason, it’s important to educate yourself before taking Social Security. The decision not only affects you, but also your spouse. A surviving spouse is eligible for their partner’s benefit if it’s higher than what they are already receiving. Be sure you and your financial professional have come up with a Social Security strategy before you turn 62.
The Retirement Ready radio show is featured every Saturday on WTMJ 620 AM at 1:00 pm. We will bring you information on: Social Security options, retirement trends, options to retire with life changes and achieving a secure financial future. Listen live here: WTMJ 620AM LIVE
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Drake & Associates does not offer tax or legal advice.