Credit: Shutterstock photoAre you like many Americans where the lifestyle you envision for your golden years and the state of your finances just don’t match up? Study after study indicates that the majority of Americans are not saving enough for retirement. The average family’s finances and savings rate trajectory aren’t even close to what their “magic number” is, even after Social Security.
Given this information, one would think that most Americans would be more active in the management of their important money, rebalancing given market conditions, analyzing their fund performance, risk factors and so on. In other words, becoming better investors. They aren’t. (For more, see: Retirement Savings: How Much Is Enough?)
The Problem
Part of the problem is that it’s difficult to take an interest in something that seems so far off in the future. It’s like going in for a physical and being told that you have a high risk of developing heart disease, someday. You dutifully start taking baby aspirins, but never stop to fully assess your health and implement a plan to stay ahead of this potentially life threatening disease.
Also, we live in a society that - fueled by advertisers and the media - glorifies a culture of youth. Most people maintain a “set and forget” attitude toward the management of their retirement accounts. Others approach retirement with a “we’ll figure something out” mindset, planning to work longer or come up with another source of income if they don’t have enough for retirement.
Teresa Ghilarducci, professor of economics at the New School for Social Research, stated in her article titled Our Ridiculous Approach to Retirement: “People hear that 70 is the new 50, and a recent report from Boston College says that if people work until age 70, they will most likely have enough to retire on,” she wrote. “Unfortunately, this ignores the reality that unemployment rates for those over 50 are increasing faster than for any other group…If those workers ever do get rehired, it’s not without taking at least a 25% wage cut.”
Anthony Kippins, of Retirement Plan Advisors, Ltd., puts it a different way: “Another possible reason for the widespread lack of interest in retirement planning may be a basically nullified view of retirement based on a negative view of the present. Many people don't like their jobs. As a result, they tend to view retirement in terms of not what they will be doing, but what they won't be…If retirement is the absence of something, the idea of planning for it just doesn't jibe.”
Whatever your reasons are for putting off the inevitable, the reality is that you’re going to get older which certainly beats the alternative. You can’t work forever, and will need to somehow pay for your retirement. So, take some time to honestly ponder the following. (For more, see: Retirement Planning: How Much Will I Need?)
What Does Retirement Look Like to You?
You may not even plan to retire. Perhaps you’ll take that part-time job you’ve always imagined. Be aware that if you start collecting early retirement Social Security benefits at age 62, each monthly benefit check will be 25%-30% less than it would be at full retirement age.
What Will Your Retirement Lifestyle Be?
Would you need the same income yearly that you have now? You may or may not know the answer to this right now, but plan as though you do. Have a professional crunch the numbers. A number used often in the retirement world is 80% of current income. But I have had clients who spend more in retirement than they did when they worked, between traveling, purchasing big “toys,” etc. This number, in most cases, is a moving target.
What Is Your Projected Annual Income?
What would you need at a bare minimum? Based on your current savings trajectory, future income sources and after-tax rate of return and inflation, are you on track to hit your number?
What Is Your Magic Number for Retirement?
Whether it’s $1 million, $4 million or $10 million, you need a detailed plan. Based on your current savings trajectory and projected rate of returns, will you be able to meet your goals?
Have You Factored in Healthcare?
Do you have healthcare issues that you will need to stay on top of going forward? A recent study by the Employee Benefits Research Institute estimates that the average “healthy” 65-year-old couple that are retired will need almost $300,000 in additional savings to cover added medical expenses throughout retirement. And since health issues can be very unpredictable, there is always the risk that medical expenses could be even higher.
What Rate of Return Do You Need to Hit Your Number?
Is this number realistic and one that would let you sleep at night? Don’t forget to factor in taxes. While the income and expense “knowns” are challenging enough to grasp, it’s the “unknowns” in retirement that truly can throw a wrench into one’s quality of life. Become better educated on the realities of healthcare costs in retirement. Factor in aging parents and the possibility of long-term care for them. How will this be funded? Other “unknowns” include your own added healthcare costs outside of what Medicare will cover (which is likely) when you retire, major market downturns or major life decisions like starting a business.
But right now start with the things you can control, such as how your retirement portfolio is doing and if it is aligned with your goals. Give your retirement portfolio a little love and attention now and it will help pay lasting dividends in the future. After all wouldn’t’ you rather stick your feet in the warm sand, rather than your head, when it comes to retirement? (For more, see: Will Your Retirement Income Be Enough?)
This article was originally published on Investopedia.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
