A recent survey learned that most Americans are not financially prepared to stop working. In fact, a large percentage have less than $50,000 in savings and investments. The Employee Benefits Research Institute (EBRI) presented a survey in 2020 called 2020 Retirement Confidence and found that almost half (41 percent) matches that description.
Of those who are indeed actively saving, they lack other practical steps like:
• Gauging monthly retirement income needs (44 percent)
• Thought about how they will occupy their time in retirement (49 percent)
• Planned on how to cover a significant expense in retirement (38 percent)
• Thinking about how to cover retirement health care expenses (36 percent)
• Determined if they will continue to work in retirement (36 percent)
• Talking with a financial advisor about selecting investment options within workplace plan (28 percent)
• Considered leaving money to a charity (9 percent)
It is noteworthy to point out that the study also shows the most confident retirees said they have spoken with a financial professional specifically pertaining to having a plan for their non-working years.
Working with a professional may improve outcomes, but it cannot make up for lack of savings. Saving enough for retirement is vital. Many of the people we talk to say they wish they would have started saving earlier.
What about healthcare during retirement?
Even if a retirement plan is very solvent and successful looking, it could still be disrupted by healthcare concerns or catastrophic illness. Many have not accurately factored health care expenses into their retirement plans. It's troubling to think that healthcare costs have increased much faster than inflation, and people are being asked to pay a larger percentage of the shared expense. Healthcare is expected to grow by 5.6 percent a year on average (Marketwatch).
It would be easy to underestimate healthcare needs during retirement because it's much higher than anticipated. For example, a recently retired couple from last year would need $280,000 to cover healthcare costs in an average retirement (CMS.gov).
Practical steps for a more enjoyable retirement
If thinking about retirement makes you a bit queasy, likely, you haven't prepared as well as you should. The good news is developing and implementing a retirement plan is relatively straightforward. Here are a few steps that can help boost retirement confidence:
• Create a retirement budget. A retirement budget is no different than a current household budget. Write down (item by item, line by line) how much you expect to spend in retirement. These estimates will become more accurate as retirement nears. Another short cut could be to estimate that you will need roughly 70-80 percent of your pre-retirement spending once you are in retirement. This can be a good way to quickly gauge what you might need in retirement.
• Save for retirement. For many people, a successful retirement strategy means saving at least 15 percent of their income (T Rowe Price). Those who have the good fortune to participate in an employer's retirement plan may benefit from employer-matching contributions. If you don't have a retirement plan at work, open an IRA and set-up automatic contributions for each pay period. Remember, the earlier you can start to save and invest, the better.
• Choose an asset allocation strategy. Asset allocation is dividing your savings among different investments, such as stocks, bonds, and other options. The allocation should be, to some degree, tailored to your individual needs and risk tolerance levels. Ultimately, the way people invest their savings is often determined by their age, risk tolerance, and retirement goals (T Rowe Price). Allocation should be to some degree tailored to your individual needs and risk tolerance levels. However, asset allocation is not the only factor that should be considered. You also need to consider asset location, where assets are held when investing for retirement.
• Prepare for long-term care. Long-term care is one of the biggest unfunded liabilities facing retirees today. Roughly 70 percent of retirees, those over age 65, will need extended long-term care (aspe.hhs.gov). If you haven’t planned for it, the cost can really put a dent in your retirement savings. Medicare Part A covers skilled nursing care in a skilled nursing facility for a specific period of time after hospitalization. It does not pay for custodial care for Alzheimer’s or other cognitive illnesses. Consequently, it may be wise to purchase long-term care insurance or add a long-term care rider to a life insurance policy. But whatever you do, you need a plan in place for long-term care expenses.
• Review your plan every year. Retirement planning is not a static activity. Retirement goals may change significantly over a lifetime. As a result, it’s important to review retirement plans often and make any changes needed.
Updating retirement plans is an important and planned activity at Brindle & Bay. We believe that money will spend better with a written and up to date plan. Our team welcomes the opportunity to be of service.