3 Retirement Pitfalls and How to Address Them Steps you can take today to create greater financial security in your golden years.
Opinions expressed by Entrepreneur contributors are their own.
Did you know that 52 percent of American households are at risk of not being able to maintain their standard of living in retirement? That's according to the Center for Retirement Research at Boston College.
The percentage of workers planning to work for pay in retirement has climbed to 79 percent, according to a new report by Employee Benefits Research Institute (EBRI). The reason: many fell behind on their savings due to losses during the recession.
EBRI's 2017 Retirement Confidence Survey finds that only 18 percent of American workers feel "very confident" they can retire comfortably.
What are Americans doing about it? Many are already working longer than ever because they are not in a position to retire.
America's approach to retirement savings is badly broken.
One solution you'll hear is to plan on withdrawing less each year from your nest egg once you retire.
Many experts now advise that retirees withdraw no more than 2.8 percent of their retirement savings each year, down from the 4 percent withdrawal rate that was long considered a safe bet to make your money last. However, when you stop to think about what that means, the numbers are sobering.
Given that rule, with a nest egg of $250,000, you could withdraw just $7,000 per year. That $583 a month is all you would have to supplement your Social Security income, which currently averages $1,341 per month.
Even if you manage to save $500,000, that's just $14,000 a year you could safely withdraw. And if you hit the $1 million dollar mark, that amounts to all of $28,000 per year. If you're saving in a tax-deferred retirement account like a 401(k) or IRA, you'll also have taxes to pay on your withdrawals.
Many people expect their cost of living to go down in retirement. Don't bet on it. Your utilities, groceries, and home and car insurance costs will most likely not be less. Your healthcare costs will almost certainly be more.
And if you think you will be able to save money because your children will be grown, think again. One in 10 grandchildren live with their grandparents. And 15 percent of young adults, 25-to-35-years-old, live with their parents. Given these statistics, you may very well end up spending more of your next egg earlier than you had planned because your nest is not empty after all!
Here are three main obstacles you'll face on your path to a secure retirement:
1: People continue to live longer but aren't working longer.
According to the Social Security Administration, 25 percent of people turning 65 today will live past 90, and one out of ten will live past 95. Yet most financial planners base their projections of how much money you'll need on living to age 85 or so.
Solution: Assume you'll live to at least 100 to determine how long your money will need to last.
2: People underestimate health and long-term care costs.
The numbers are shocking, and almost no one is accurately accounting for this: A 65-year-old couple retiring now will need $260,000 just to cover out-of-pocket healthcare costs in retirement, plus $255,000 to cover an average stay for one person in a nursing home. But most people close to retirement don't even have that much in total retirement savings.
Solution: Increase the amount you save every single year, and put more of your savings in financial vehicles that are safe and guaranteed to grow even when the markets are tumbling.
3: People ignore the impact of a stock market crash.
"Sequence of returns" risk can be a huge wealth-killer. A stock market crash at that stage of your life can reduce your retirement lifestyle forever.
Solution: To determine whether your retirement plan will give you the financial peace of mind you desire, you need to answer these three questions:
- How long will I live?
- How much will my retirement account be worth in 10, 20 or 30 years?
- Do I have an income that's guaranteed to last as long as I will live?
If your answers to these questions make you queasy, I urge you to consider adding safe money and guaranteed lifetime income strategies -- such as high cash value dividend-paying whole life insurance and annuities -- to your financial plan.
The peace of mind you'll enjoy, knowing that a portion of your savings is protected from an unfavorable sequence of returns, is priceless!
People must expected the unexpected.
Despite the many people planning to work in retirement to make up for a savings shortfall, this is not something you should count on. Among retirees EBRI surveyed this year, 48 percent were forced to leave the workforce earlier than planned due to health problems, disability, or having to take care of a loved one.
"The financial consequences of an unplanned early retirement can be heavy," the study states. "Retirees who retire earlier than planned are more likely than those who retire when expected or later to say they are not confident about having enough money for a comfortable retirement or about paying for basic expenses, medical expenses, and long-term care expenses."
These are all good reasons to start taking steps today to make sure you don't have to live out your golden years in a state of financial uncertainty.