At the current rate of saving, 34 percent will leave the workforce without contributing any money towards retirement, relying on Social security and Medicare health insurance to pay for living costs. The transfer of responsibility from the employer to the employee has many workers struggling to balance the financial demands of today, with the prospect of paying for two decades or more of retirement.
Common misconceptions about money, long-term financial needs, and the most effective steps to take to improve finances, can create a financial trap that is difficult to overcome. Here are the top money myths that can leave you struggling financially in retirement.
It’s Too Late to Save
Trying to save one million or more for retirement, when you have a late start is overwhelming. The truth is, an underfunded retirement is a norm, not the exception. Rather than giving up on achieving a set dollar amount by the age of 65 (or your preferred retirement date), begin by increasing contributions today, even if it is by a small amount. Adding 1% every year to current contributions can add up over a decade or more. Over a 40-year period, your savings could nearly triple.
Today’s seniors need more for retirement than any other generation. They also have less help from employers, through pensions, and must rely more on personal savings. Other factors which increase the amount of savings required include the rising cost of living, higher health care costs, and longer lifespans. To maintain your quality of life, it is not uncommon to need enough money to fund thirty years or more in retirement.
Waiting to increase contributions will lower the power of compounding, which increases the amount you must contribute to achieving your financial goals. A bountiful retirement requires setting aside money in dedicated retirement accounts, and you are never too young or too old, to begin saving. Delays make it harder, but not impossible, to reach your goals.
Medicare Will Cover Health Care Costs
At 65 you qualify for Medicare, a health care program for seniors, which only covers about 80% of health care costs. Supplemental insurance plans help to cover some, but not all of the other 20% of medical costs. Hewitt Associates estimates health care expenses cost retirees as much as 20% of annual income. Seniors must pay out-of-pocket for premiums, prescription drugs, deductibles, and excluded care. Most policies do not provide coverage for vision, hearing, dental, or long-term care needs.
Health insurance coverage offered by employers fell to 36%, compared to 66% availability in 1988. With only 13% of private sector employers offering retired employees, medical benefits, seniors experience limited access, rising premiums, and shrinking coverage.
To stretch retirement dollars, evaluate your coverage needs, which should include a plan for long-term care, not provided for my Medicare.
Social Security Will Pay for Retirement
Social Security was not designed to pay 100% of the costs of retirement. It was meant to keep seniors out of poverty. With the average payment of only $1,258 per month in 2018 and rising debt among retirees, $15,000 per year is not enough to live comfortably in most parts of the country.
If you find yourself short on retirement savings, it is possible to delay Social Security payments until age 70, which will raise your payout by approximately 8% for each year you wait.
You Will Need Less Money in Retirement
Living on 50 or 60% of current income is less realistic today because most people do not enter retirement without debt and housing costs. In addition to carrying debt into retirement, the two biggest factors in retirement costs are longevity and rapidly rising health care costs. The Employee Benefit Research Institute determined half of the retirees spend 95% or more of pre-retirement income during retirement. Fully replacing income for 20 plus years in retirement takes planning.
Contributing to a Work Retirement Account Is Enough
To help workers save, many employers now auto-enroll new employees into the workplace retirement plan. The problem is that most company policies begin contributions at very low percentages, which can provide workers with a false sense of security. Funding retirement requires you to set aside more than 1 to 3% of current income. It is a good starting point, but not the only savings required.
One popular strategy is to raise contributions at least 1% each year and contribute to an individual account (IRA) when possible. In addition to regular monthly contributions, diverting bonuses and financial windfalls into retirement accounts can ramp up savings.
The amount you should contribute each month will depend on several factors, including your current age, the current level of savings, when you plan to retire, and how you want to spend retirement years.
You Have More Important Financial Obligations
The financial pressure to pay current bills can derail the best savings plans. You might struggle currently with credit card debt, student loan payments, building an emergency fund, eliminating the mortgage, or helping adult children. Each financial goal is an important part of your overall financial plan.
However, postponing retirement contributions reduce account growth and will leave you with less money at a time when it is harder to find employment to make up the difference between income and financial needs.
You Will Not Live in Retirement Long Enough to Enjoy the Savings
Today, the average person lives between 75 and 85 years old, with half living longer. The Social Security Administration estimates that one in four will live past age 90 and 10% will live beyond 95. Financial planners recommend planning to pay for at least 30 years in retirement at 95 to 100% of current income, to ensure you do not run out of money.
Running out of money in retirement typically means living in poverty or relying on grown children for support. In many cases, declining health precludes seniors who run out of money from returning to the workforce. Building retirement savings are an important aspect of financial planning because you cannot borrow your way through retirement.