6 Challenges to Achieving Financial Security in Retirement

Pamela Yellen article healthyaging.net

By Pamela Yellen

People who live an average lifespan today face a growing risk that they will run out of money in retirement – a scary trend that should have all of us rethinking how much we need to be saving.

The typical 65-year-old has only enough savings to cover 9.7 years of retirement income, according to a new study by the World Economic Forum. That leaves the average American man with a gap of 8.3 years. Women (who live longer) face a 10.9-year gap with no savings left.

For most of the last century, Americans’ lifespans have been increasing. Over the last three years, average lifespans have dropped slightly for the first time since World War I, a trend attributed to increases in opioid overdoses, liver disease, and suicides.

Still, most people nearing retirement today can expect to live longer than previous generations. Just 50 years ago, the average lifespan was 66.8 for men and 74.3 for women. Now men can expect to live an average of 76.1 years, while women can anticipate living until 81.1.

Among those turning 65 today, 25 percent will live past 90, and one out of 10 will live past 95, according to the Social Security Administration. That’s a double-edged sword if you end up outliving the money you have saved for retirement by decades!

Longevity is only one of the challenges American face in preparing for retirement. Others include:

1. Insufficient savings

The typical household nearing retirement has an average of only $135,000 in their combined savings – enough to provide at most $600 of income per month.

2. Extreme health care costs in retirement, even for healthy couples

A healthy 65-year-old couple retiring now will spend an inflation-adjusted $551,000 on out-of-pocket medical costs not covered by Medicare.

3. Taxes

You’ll owe the IRS 25-50 percent of your savings when you take income from a tax-deferred account, such as a 401(k), IRA or 403(b). Most people look at their retirement plan balances and think it’s all theirs. They tend to forget they’ll owe the IRS taxes on every penny they’ve put in and every penny of growth.

4. Social Security

Social Security benefits have lost 1/3 of their buying power since 2000, as many of the things retirees typically purchase have increased several times faster than Social Security cost-of-living adjustments.

5. Inadequate investment returns

The typical investor in equity mutual funds has earned only 3.88 percent annually for the past 20 years, beating inflation by a meager 1.7 percent per year. Asset allocation and other types of investors actually lost ground over the last two decades.

6. Withdrawing too much, too fast

People who follow the once-recommended “4 percent rule,” which said retirees could take 4 percent out of their retirement accounts each year have a 50 percent probability of running out of money over 30 years.

The current recommended annual withdrawal rate is just 2.8 percent. If you have a $500,000 nest egg, that would give you just $1,166 per month. If you have $200,000 saved, you could withdraw $467 per month. And with $1 million saved, that’s $2,333 a month. How far will that go toward providing the lifestyle you are looking forward to in retirement?

Fortunately, there are some steps you can take now to reduce your chances of running out of money in retirement. Here are some of them:

1. Don’t rely too much on volatile, unpredictable, government-sponsored retirement accounts for income in retirement. If you don’t know the minimum guaranteed value of your savings when you want to tap into them, you don’t have a plan – you’re gambling.

2. Don’t rely too much on Social Security or a public pension fund. Social Security will “become depleted and unable to pay scheduled benefits in full on a timely basis in 2034,” according to the fund’s trustees. Experts warn many state pension plans are underfunded.

3. When calculating how much you’ll need in retirement, use the currently recommended savings withdrawal rate of 2.8 percent. And to avoid living longer than your money, assume you’ll live to at least age 95. There’s a good chance you or your partner will.

4. Save more in guaranteed, safe, and liquid assets. Put more of your savings into financial vehicles that aren’t subject to the high volatility of markets such as stocks, real estate, and other risky investments.

5. Before you commit money to any financial product, make sure it will help you achieve your financial goals without taking unnecessary risk, give you control over your money, and provide the peace of mind that will allow you to sleep at night.

With so many people facing the prospect of running out of money in retirement, it’s time to ditch the conventional “wisdom” that has left us in this predicament. Instead of following the masses, follow the steps above to build real financial security – for however long you live.

About the Author: Pamela Yellen is founder of Bank On Yourself, a financial investigator and the author of two New York Times best-selling books, including her latest, “The Bank On Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future.”  Learn more at www.bankonyourself.com.
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