For every beautiful retirement dream, there can often be an ugly worry.
I’d love to travel. (But how will I pay for it?)
I want to move someplace warm. (But how will I pay for it?)
I hope to golf and see my grandkids more often. (But how will I pay for it?)
Are you sensing a theme?
The No. 1 fear of people who are close to or already in retirement is that their money won’t last as long as they do.
And who can blame them? There are many factors that can derail your future if you don’t address them in advance, including:
There is much talk about reducing tax rates and simplifying the nation’s tax code. That may or may not happen in the near future, but think about it: Are lower taxes a realistic long-term expectation? Now, I’m not making a political statement. It’s just simple math. The national debt is nearly $20 trillion; someday, more than likely, we’ll have to do something about it.
And yet, many savers don’t consider taxes when building a retirement plan. This is especially worrisome when you consider all the tax-deferred accounts you’ve accumulated during your working years, like IRAs, 401(k)s, TSPs and others. You know, the money you’re planning to live on.
The government allowed you to take income tax deductions on the money you put into those accounts over the years, and it let the accounts grow tax-deferred. When you retire, you’ll begin taking money out of those accounts to live on, and every dollar you withdraw from any of those accounts during your retirement will potentially be subject to income tax. Consider this hypothetical example: Assume you need $50,000 to live on and that the money you withdraw from your IRA is all in the 25% tax bracket. If you withdraw $50,000, you’d owe $12,500 in federal income tax — leaving you with just $37,500 to live on. See the problem?
This is a hidden predator many people overlook in their planning. If you use the long-term U.S. inflation rate of about 3.3%, in just a little over 21 years, the dollars you spend today to support your lifestyle will double! That’s without changing your lifestyle in any way. So, you can’t just add up all your living expenses today and divide that number into your total retirement savings to find out how long your money will last! Instead, you need to add compound inflation to your living expenses over the years. That could significantly reduce how long your money may last.
3. Health care.
Prescription and over-the-counter drug prices can take a toll on your nest egg. Long-term care costs can crush it — and leave a surviving spouse with a greatly diminished lifestyle. And there are expenses you might not even be thinking about, such as Medicare supplement premiums, medical co-pays and, one that I hear about a lot from our retirees, dental care, which can become increasingly expensive as you age.
Even if you don’t live to be a centenarian, chances are good you’ll make it into your 80s or even 90s. According to the Social Security Administration, a married couple age 65 today can expect one spouse to live to be 85. And, from a recent study by the Society of Actuaries, there’s a 45% chance one spouse will live to be 90 and an 18% chance one may live to 95. For many, that’s more time spent in retirement than in the workforce. That’s a very long time for your money to have to last.
5. Market volatility.
Brace yourself: Bull markets don’t last forever. Our grandparents had pensions and still lived frugally, saved voraciously and invested conservatively. Today, most retirees don’t have pensions and, with today’s interest rates having been so low for so long, many investors feel compelled to leave safer strategies and invest more heavily in the stock market. But, when the market corrects or if it drops precipitously (remember that 57% drop from the fall of 2007 to the spring of 2009?), your retirement funds could be greatly diminished and your future lifestyle in question.
6. Savings shortfall.
The 401(k) plans we’re so familiar with today started in 1978, and the pensions our parents and grandparents relied on began disappearing at about the same time. When those changes occurred, people didn’t really understand just how much they’d need to put away. The 2016 PwC Employee Financial Wellness Survey found that roughly half of Baby Boomers have set aside $100,000 or less for a retirement that could last 20, 30 or more years. Only 15% of those surveyed had more than $500,000 saved.
7. Too much debt.
Debt can be disastrous in retirement, yet many people in their 60s and 70s still carry high balances on credit cards; have mortgages, auto loans and/or student loans; and/or co-sign on loans for family or friends who may possibly default. If you’re making minimum payments on credit cards while you’re working, it’s going to be even more difficult to pay down those bills when your paychecks stop in retirement.
So, what can you do? While some of these problems, like taking on too much debt, may be self-inflicted, others, like poor health, job loss or market volatility, may be beyond your control. Nevertheless, take action and focus on the things you can do to help yourself today.
- Pay off your debts, and don’t take on anyone else’s. Try to go into retirement debt-free. Paying off your mortgage may be the possible exception; talk to your financial professional about whether this is a good idea for you.
- Boost savings in your retirement accounts. If you aren’t contributing up to your employer match on your 401(k), start there. If you can save more, you should. Take advantage of contributing to any other retirement accounts you may be eligible for such as TSPs, IRAs, Roth IRAs or Roth 401(k) accounts. Remember, the money you save today is the money you’ll live on in the future.
- Stash cash in your savings account. A 2015 Bankrate survey found that just 37% percent of Americans had enough in savings to pay for a $1,000 emergency. Most financial professionals suggest having enough cash to cover three to six months of living expenses. If you can save enough to cover 12 months of living expenses, even better!
- Evaluate ways to create lifetime income. Talk to your adviser about Social Security withdrawal strategies and investment vehicles, such as annuities, that could provide reliable income.
- Explore ways to minimize taxes in retirement. One option is a Roth IRA; you’ll pay the taxes now when rates are potentially lower, not later when taxes might be higher. Talk with your financial professional about this and other strategies to create tax-advantaged retirement income.
- Create a reasonable budget and stick to it. Be tough but realistic. It’s like going on a diet: If your plan is too austere, you won’t stay with it. Take a “timeout” and think before spending. Often just thinking about it for a few days will save you from spending in ways that could undermine your future.
- Take care of your health. Exercise more. Eat better foods. And take care of your teeth!
- Shop around for insurance that fits your needs. The insurance industry offers a wide array of choices for various health, long-term care and death benefits. Since most of these policies require some level of good health to apply, look into them while you’re healthy enough to qualify.
- Work with an experienced, comprehensive financial professional who is focused on retirement income planning, not just asset accumulation, and who puts your best interests first. Remember, those are fair questions to ask when you’re interviewing a financial professional. People think that’s what all financial professionals do, but you need to know for certain how someone works and if he or she is a fiduciary putting your best interests first.
Now’s the time for you to take charge of your future! Knowledge is power: Once you address these issues — and get the right financial professional and retirement plan in place — you can get back to dreaming about your retirement without fear of what the future might bring.
Article Published by Kiplinger May 2017
Written by Linda Gardner