The realities you may face upon retiring could be far from your retirement dream. Retiring without sufficient funds is not ideal, but not being able to retire at all is one of the worst-case scenarios.
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However, many other challenges can arise on the path to retirement. If you haven’t adequately planned for exiting the workforce and living without a steady income, you may encounter harsh truths about retirement. These hidden challenges could jeopardize your retirement plans, but experts consulted by GOBankingRates have provided solutions.
Your Financial Worth Loses Significance in Retirement
Even if you’ve diligently saved for the future and built a substantial nest egg, the amount might not last long in retirement, especially if you reside in a high-cost-of-living state.
When setting retirement savings goals, many individuals do so without accurately determining their monthly expenses in retirement, as stated by Niles Geary, co-founder and CEO of Voyage Partners. Only 38% of workers have estimated their required monthly retirement income, according to a survey by the Employee Benefit Research Institute and Greenwald & Associates.
“Your net worth loses importance in retirement,” Geary remarked. “The critical factor is the income generated by your net worth.”
Solution: Develop an Income Strategy
Don’t assume that your expenses will drastically decrease in retirement. Geary notes that most retirees spend between 80% and 90% of their pre-retirement expenses. Hence, your savings must generate adequate monthly income to sustain your current spending habits.
If you have retired without calculating your monthly income needs, you may need to adjust your spending. Geary suggests differentiating between essential needs and discretionary wants to determine the necessary monthly budget.
Taxes Can Impact Retirement Income
Many retirees face the challenge of unexpected high tax bills on their retirement income. Geary highlights a common misconception that tax rates will decrease in retirement. If your savings are primarily in a tax-deferred retirement account like a 401k, you will be taxed on withdrawals at your regular income tax rate. Consequently, you may need to withdraw more than your budgeted amount to cover taxes.
Solution: Establish Tax-Efficient Income Sources
To minimize your tax burden and retain more of your retirement income, consider saving in tax-free accounts like a Roth IRA or Roth 401k. Withdrawals from these accounts are tax-free in retirement, providing a valuable source of tax-efficient income.
Geary recommended inquiring with your employer about the availability of a Roth option for your retirement account. This option is typically offered, but if not, requesting to add a Roth 401k to your account choices is advisable. Another strategy to consider is funding a permanent life insurance policy, which can serve as a source of tax-free income during retirement by borrowing against the policy’s cash value. Consulting with a financial planner can help assess if this approach aligns with your retirement savings goals.
When calculating your retirement income needs, it’s crucial to factor in inflation. Marguerita Cheng emphasized the stealth impact of inflation on purchasing power over time. To counteract this, investing in equities with higher returns can help safeguard your purchasing power in retirement and prevent running out of funds. Cheng suggested maintaining stocks or stock mutual funds in your investment mix even after retirement.
Planning for a potentially long retirement is essential as life expectancy continues to increase. Utilizing tools like the Social Security Administration’s life expectancy calculator can assist in determining how long your savings need to last. It’s recommended to secure a financial plan that supports your income requirements for potentially 30 or more years to ensure a comfortable retirement. Consider delaying retirement if your savings fall short of this goal.
Addressing long-term care costs is crucial to safeguard your savings in retirement. Geary warned that even individuals with substantial savings could exhaust their funds without a plan for long-term care expenses. Long-term care coverage is essential, as health insurance and Medicare offer limited protection for such costs. With long-term care expenses on the rise, having a plan in place can prevent financial hardship later on.
Consider securing long-term care insurance to avoid financial strain in the future, suggests the Administration on Community Living. If the idea of paying for insurance you may never use doesn’t sit well with you, a life insurance policy with a long-term care benefit could be an alternative. Start exploring these options early, ideally before turning 50, to save on premiums and increase the chances of approval.
Healthcare costs in retirement can be overwhelming if not properly planned for. Fidelity Investments estimates that a 65-year-old couple retiring in 2022 would need around $315,000 for medical expenses alone, excluding long-term care costs. To mitigate these expenses, consider working longer for continued health insurance coverage or contributing to a health savings account with a high-deductible health plan. Consulting insurance experts for post-retirement coverage options is also advisable.
Relying solely on Social Security for retirement income can be challenging, given the average monthly benefit of $1,692. To avoid financial constraints, it’s crucial to build additional savings during your working years. Delaying Social Security benefits beyond full retirement age can increase your monthly income significantly, with a maximum benefit of $4,555 at age 70. Starting benefits early at 62 may lead to a permanent reduction of up to 30%.
Retirement might bring unexpected challenges like boredom, as noted by Brett Anderson of St. Croix Advisors. With significantly more free time post-retirement, finding engaging activities beyond work becomes essential.
“Preparing your finances for retirement is crucial, but it’s also important to consider how you’ll stay engaged and make a meaningful impact during your golden years,” advised Anderson.
To avoid potential pitfalls in retirement, it’s essential to create a bucket list outlining activities and goals you wish to pursue. Byrke Sestok, a certified financial planner, suggests that failing to plan for your newfound free time could lead to feelings of depression and overspending. Embrace this period as an opportunity to tick off items you’ve longed to experience, such as volunteering, learning new skills, or nurturing hobbies.
While retirement may initially bring thoughts of leisure, some individuals find themselves returning to work for various reasons, with a growing number opting for full-time employment. Consider this as a chance to engage in work that brings fulfillment and purpose, advises Alexander Rupert from Sequoia Financial Group. Exploring different job opportunities or embracing the gig economy can provide flexibility and extra income while staving off boredom.
In some cases, financial challenges may arise, leading retirees to rely on their adult children for support. Making retirement savings a priority can help prevent such situations. A study by Savings.com revealed that many parents continue to financially assist their adult children, highlighting the importance of building a robust retirement fund to avoid future dependence.
For those who have diligently saved for retirement, the prospect of spending those savings can evoke feelings of guilt. Remember, retirement is a time to enjoy the rewards of your hard work, so embrace this new chapter with confidence and fulfillment.”
It can be challenging to adopt a frugal mindset if you have become accustomed to saving money excessively. According to Sestok, individuals who have diligently saved for retirement often struggle to spend their accumulated funds as it goes against their natural inclination to save.
To combat the guilt associated with using your retirement savings, Byrke suggests creating a budget range based on your assets and retirement income sources, with a monthly spending goal in mind. Despite the common lack of preparedness for retirement among Americans, those who fear spending their savings risk missing out on fulfilling life goals and experiences.
If you have retirement savings in accounts like a 401(k) or IRA, you must start taking minimum withdrawals once you reach 70 1/2 years of age, regardless of whether you need the funds. Failure to do so may result in a tax penalty equivalent to 50% of the required withdrawal amount.
To avoid being forced to withdraw more than needed, diversify your savings across various account types instead of solely relying on a 401(k) or IRA. For instance, consider placing some savings in a Roth IRA, which does not mandate minimum distributions. Moreover, transitioning a Roth 401(k) to a Roth IRA upon retirement can offer flexibility.
While relocating to a more affordable area may seem financially prudent in retirement, frequent moves can be costly and exhausting. Before making a permanent move, LaBrecque recommends renting in your desired location for a trial period to ensure it aligns with your lifestyle and preferences.
In retirement, social dynamics with friends can change when differences in financial preparedness become apparent. To avoid feeling pressured to match your friends’ spending, take the lead in choosing budget-friendly activities and politely decline outings that exceed your financial comfort level.
Remember, staying true to your budget is key to enjoying a fulfilling retirement without unnecessary financial stress.
“Do not embark on the round-the-world cruise,” she advised. Ashleigh Ray assisted in the reporting of this article.
