Americans are currently facing a serious retirement crisis. While many retirees have a general sense that they have saved enough money for retirement, a study by the National Bureau of Economic Research found that approximately 46% die with only $10,000 in assets. That does not bode well for the future; with lifespans increasing, the risk of outliving your money also increases. Here are some helpful suggestions to avoid this disaster.
Understand Your Living Expenses
Many retirees grossly underestimate their future living expenses. Unfortunately, creating an accurate estimate of your post-retirement living expenses can be challenging. Not only are they hard to predict, but many people create their estimate assuming they will decrease expenses in retirement, and they fail to factor in the costs of additional unexpected expenses.
The National Bureau of Economic Research found on average that most retirees do not significantly reduce their expenses after retirement. They usually continue the same lifestyle they had immediately prior to retiring. Certainly, it is possible to reduce spending in retirement, but it’s better to do so because you want to, not because you’re forced to do it.
Rising healthcare costs are one of the biggest unexpected future costs which pose a big risk for retirees. The rapid rise of these costs combined with the ever-increasing life expectancy can create angst, and real problems, in even the most confident of retirees. In fact, according to a study done by the Employee Benefit Research Institute, only 14% of respondents felt “very confident” about their ability to afford healthcare in retirement. A whopping 32% of respondents were outright “not at all confident”.
The Kaiser Family foundation found that from 1999 to 2015, inflation increased approximately by 3% per year while workers’ earnings increased 3.5%. However, their research showed that during this time period health care insurance premiums increased by a staggering 12.6% per year, far outweighing the rise in workers’ earnings. If this trend continues, it will impact almost every retiree.
If you think you know how long you’ll live, think again. Most people base their expectation on how long their mom, dad, or uncle Bertie lived. But the life expectancy of previous generations do not address our issue today. The reality is that science has made many substantial breakthroughs, and life expectancy for both men and woman have increased dramatically. This is a good thing, as long as you prepare accordingly.
Many retirees are not adequately preparing for the potential that they may live longer than expected. When social security was first introduced, life expectancy was approximately 60. In the 1950s – midpoint for the boomer generation – life expectancy was 67. According to the Social Security Administration, average life expectancy today has risen to about 84 for men and 86 for women. Most of us will need to rely on our retirement savings much longer than we anticipated.
As a corollary, most financial plans were not designed to account for the possibility of living more than two decades in retirement. Even if you estimated your expense level correctly, you may well have under estimated how long you’ll be spending at that level. Even if you factored in a good amount of extra healthcare costs, you may not realize that longer life spans also increase the likelihood you’ll incur still more costs for assisted living and/or long-term, non-medical care.
Change Your Paradigm
For many retirees, there are choices. They don’t have to accept poor outcomes if they can make some wise strategic choices today. One of the best strategies is to delay “full” retirement. This doesn’t mean you have to stick with a job you hate; it doesn’t even mean you have to keep working the same number of hours.
You can stay where you are and cut back some of the hours. Many employers realize the value they have in seasoned employees and may be willing to keep that experience in-house by allowing part time work. Other employers are willing to re-engage a retiring employee as a consultant. If you own your own firm, this idea can be a no-brainer. Your successor – or the kids, if they took over – might benefit significantly by keeping you around a while longer.
You can also start a second career. By this, we mean working where you’ve not worked before – perhaps doing something you love, but have never been able to pursue extensively, or by working in an industry which overwhelmingly uses part-time workers. This strategy gaining popularity. According to a study by the MetLife Foundation, about 9 million Americans have launched these “encore careers”. More than 80% of the survey respondents said that these encore jobs gave them a “tremendous amount” or “quit a bit” of satisfaction during retirement. These encore jobs also create extra money during retirement which can dramatically improve a retiree’s financial situation.
Look At Social Security Strategically
Social Security plays a big role in the success of a retirement plan. Social Security benefits are a good source of steady income, but choosing when to start collecting these benefits is important. Ideally, you don’t want to start taking benefits until you reach your “full retirement age” – the age at which you’re eligible to receive your full Social Security benefits.
While the “right” age to start taking benefits depends on a person’s individual circumstances, in general, delaying benefits is the better option. Especially when we consider increasing life expectancy, delaying these benefits will allow you to receive a larger payment for more years than you might have contemplated. Together, that might provide a substantial improvement to your financial health during retirement.
Don’t Be An Ostrich
Putting your head in the sand, or hoping a rich uncle will leave you an unexpected inheritance, rarely works. You have to investigate and understand the risks you face in retirement. Navigating these risks can be a headache, but the success of your retirement planning directly relates to knowing the risks and developing appropriate solutions.
If you have any questions, or just want a second opinion, please feel free to call us and schedule a free consultation.