Retirement isn’t all sailboats and golf courses. At least, that’s not what the one in four Americans who fear outliving their income think. That’s according to a recent survey by the Indexed Annuity Leadership Council, which also found that nearly one in five Americans don’t have a clue about how much they’ve saved for retirement.
Still, for those worried about retirement, forewarned is forearmed, as the saying goes. We’ve compiled 27 ugly truths about retirement, so you’ll know how to best prepare for each — and increase the chances you’ll truly enjoy your most golden of years.
1. Some of Your Investment Success Will Be Left to Chance
What happens in the market during the 10 years before and after your retirement date can play a significant role in how well-funded your portfolio will be.
“It’s difficult to replace lost money during this period of time, either because of time constraints of the loss of earned income,” said Patrick Daniels, financial planning analyst at Precedent Asset Management in Indianapolis, Ind.
To decrease the potential for losses during what Daniels refers to as the high-risk window, he suggested investors “take a conservative approach with their investments” during that timeframe.
2. But You Can Still Invest Too Conservatively
Shy away from high-potential investments like stocks, and you could end up outspending your lifestyle. That’s according to Joseph A. Carbone, a certified financial planner and founder of Focus Planning Group in Bayport, N.Y.
“Retirees should be looking to invest in total return-type strategies that focus on stock appreciation — more specifically dividend-producing stocks — and good-quality bonds that don’t have long maturities,” said Carbone. “Many of my clients who are in or approaching retirement have a 60 percent stock and 40 percent bond allocation with an emphasis on dividend-producing stocks and bonds that have a duration of less than six years.”
3. And You May Not Be Saving Enough
More than half of Americans have less than $10,000 saved for retirement, according to a recent GOBankingRates survey. Even if you plan to spend your golden years eating cat food, that dollar amount won’t come close to cutting it. Matt Ritt, certified financial planner with employee financial wellness benefit program Questis suggested investors “start saving as early as you can.”
He suggested investors take advantage of 401k, 403b, and IRA accounts and maximize contributions whenever possible. To find the funds, “limit your expenses and stick to a reasonable spending plan,” said Ritt.
4. Whether You’re Young…
More than one in three millennials haven’t saved a cent for retirement, according to the Indexed Annuity Leadership Council (IALC). That’s a real shame, too, because the younger you are, the greater your potential to grow your nest egg through the power of compound interest. Start saving just $200 per month at age 25, and you could have $702,856 accrued by age 65, assuming an 8 percent rate of return.
5. …Or Whether You're Older
Sadly, baby boomers — the cohort closest to retirement age — aren’t doing much better. One in four boomers have just $5,000 or less saved for retirement, according to the IALC survey. Late savers might have to play catch-up with their retirement contributions — and might even have to delay retirement.
6. You’ll Probably Live Longer Than Your Folks, Which Costs More
The average life expectancy in the U.S. today is 78.8 years, according to the Centers for Disease Control and Prevention. Still, the longer we live, the more we could have to shell out to fund our extended golden years.
“With Americans living longer than ever, it’s no surprise that their biggest concern is outliving their income,” said Jim Poolman, executive director of the Indexed Annuity Leadership Council. “But the good news is, there are solutions for outliving income, such as looking into products that offer guaranteed lifetime income — such as fixed indexed annuities.”
7. You Could Lose Out by Mistiming Your Social Security Benefits
Start taking Social Security payments before your full retirement age, and you’ll permanently decrease your monthly payment. Wait until age 70, and you’ll get more dough with each check.
Still, that doesn’t mean one strategy is always better than the other, particularly when you factor in spousal and survivors’ benefits. In short, it’s complicated.
Fortunately, several Social Security optimzers that can help you figure out the best time to start taking Social Security benefits — such as Quicken's Social Security Optimizer —have been cropping up online.
8. You Might Regret Skipping Your Roth Contribution
The younger you are, the more you can benefit from Roth accounts because they’re funded with after-tax dollars, which accumulate investment earnings tax-free for the life of the investment, said Ritt. That makes them a great option if you expect to have a higher tax rate in retirement than you do now. By tapping your Roth account before your taxable account, you decrease the amount of distributed funds you’ll pay tax on for that year.
9. You'll Have Numerous Financial Issues to Consider
“Those nearing retirement and those that have just begun retirement face the challenge of planning cash flows for their new lifestyle,” said Scott Smith, a certified financial planner with Olympia Ridge Personal Financial Advisors in Rochester Hills, Mich.
Before you tap your IRA or brokerage account, Smith suggested creating a five-year cash flow plan, which should consider the tax repercussions of distributing from your pension, annuity, Social Security, retirement savings and even available part-time income.
“Often, these choices are made without tax efficiency in mind, and the retiree ends up paying more in taxes than they really need to,” said Smith.
10. You’ll Probably Need to Supplement Your Medicare
There are many procedures that aren’t covered by Medicare, including dental, hearing, vision and long-term care in an assisted-living or nursing facility. Many retirees also face unexpectedly high deductibles and copays.
“The best solution is to include unexpected medical costs in your budget as you build your retirement savings,” said Joshua Zimmelman, president of Westwood Tax and Consulting. You can also enroll “in a Medicare supplemental insurance plan, which will help pay for copayments, deductibles, co-insurance, prescription drugs and medical care while traveling overseas,” he added.
11. Your Healthcare Will Cost More Than You Expect
The average couple retiring today can expect to pay upwards of $377,412 in out-of-pocket health care costs. That’s according to a recent retirement health care costs data report released by HealthView Services.
“A Health Savings Account, or HSA, can be a huge help when it comes to preparing for those health care costs in retirement,” said Jody Dietel, chief compliance officer with employee-benefits provider WageWorks. When paired with a high-deductible health care plan, HSA contributions are made tax-free, the balance accrues tax-free, and withdraws are made tax-free, she explained. “The account can build a healthy nest egg that can save you from having to pull from your 401k for those unforeseen healthcare costs.”
12. Most People Will Need Long-Term Care — and it’s Expensive
More than two-thirds of people over age 65 will need long-term care at some point in their lives, according to the U.S. Department of Health and Human Services. “The cost will vary by state, but three years can easily set you back $300,000,” said Mark Struthers, fee-only financial planner and founder of Sona Financial in Chanhassen, Minn.
To protect against the likely expense, Struthers suggested you purchase long-term care insurance, which was created to cover long-term costs — like skilled nursing, assisted living and hospice care — that traditional insurance policies generally don't cover.
13. Your Overall Health Will Affect Your Retirement Costs
Regular physical exercise and activity can help manage and prevent chronic disease, which is expensive to treat, according to the CDC. Sample exercises and diet information for retirees and pre-retirees can be found at the National Institute on Aging.
14. Inflation Can Eat Away at Your Nest Egg
Thanks in large part to strategic moves by the Federal Reserve, the U.S. has seen very little inflation for the past 25 years. Still, as anyone who’s lived through a sky-high inflationary environment can attest, 10 percent per year inflation can — and has — happened. Many times throughout history, in fact.
Inflation “can be devastating for retirees,” said Struthers. “If we are in retirement for 30 to 40 years, and we have a fixed income stream, its purchasing power can easily be cut by 60 to 70 percent.”
To combat inflation’s erosive effects, Struthers suggested inflation-sensitive assets like treasury inflation-protected securities (TIPs), I-Bonds and real estate.
15. You Don’t Really Know How Much Money You Spend
It's important to have a solid understanding of how much money you're spending — but if you don't, you're not alone.
“Over half of the people I talk to who are gearing up for retirement don’t have a good understanding of how much they spend and where it goes,” said Daniel P. Johnson, a certified financial planner at Forward Thinking Wealth Management in Ohio.
Retirees need to know this information because they’ll use their investments to fill the gap between what’s going out and what’s coming in through their pension and Social Security plans.
“There is a huge difference if you are anticipating to need an additional $20,000 annually from your investments to fill the gap versus actually needing $50,000,” Johnson said.
16. Your Child Can Borrow for College — But You Can’t Borrow for Retirement
Many parents find themselves stuck between wanting to help their children pay for college and wanting to save for retirement, said Sally Brandon, vice president of Rebalance IRA. However, “putting a lot of money into a college fund isn’t going to help if your retirement savings suffers as a result,” she said.
Instead, Brandon suggested setting a budget for what you can afford to pay toward college.
“Tell your child what portion you can afford to pay," she said. "If you have extra money after putting away what you need for retirement, so much the better."
17. Your Employer Might Not Help You Prepare
Not all employers offer a 401k or similar plan. “While a 401k is a great retirement tool when available, there are other options available to you,” said Brandon. For people without an employer-sponsored plan, she recommended an automated payment plan be set up to fund a Roth IRA.
“A Roth IRA helps you save both for emergencies and retirement. Money you put in as a contribution can be taken out tax-free later,” Brandon said. “The account can also act as [an] estate planning tool and is generally more tax-efficient than a traditional IRA.”
18. You Could Overspend on Housing...
One in four retirees carries a mortgage after saying goodbye to their day job, according to a recent survey conducted by retirement plan provider Voya Financial. “Some retirees even upsize their homes,” said Cary Carbonaro, a certified financial planner with United Capital of New York and New Jersey and author of “The Money Queen's Guide For Women Who Want to Build Wealth and Banish Fear.”
A hefty mortgage payment can really crimp cash flow, particularly for people on a fixed income. “Cutting your costs by downsizing is always a good idea,” said Carbonaro. “Taxes, utilities and maintenance costs almost always go up.”
19. ...Or You Could Be House-Poor
Then again, paying down your mortgage might not be the best solution if it leaves you without enough of a cash cushion.
“If most of your wealth is tied up in your primary residence going into retirement, it can be tricky to find a good solution that allows you to maintain your desired lifestyle — especially if you want to stay in the home,” said Taylor Schulte, founder and CEO of San Diego-based commission-free financial planning firm Define Financial.
Schulte suggested downsizing and using some of the equity to help fund your retirement. “Many people in this situation have a home that is far too large for their needs anyway,” he added.
20. You Might Even Have to Move
Depending on where you live, the best way to find more affordable lodging might be to move to a less expensive area of the country. For many people, it’s a move that can cut costs substantially. It’s also an opportunity to relocate to a more attractive climate, move closer to grandkids or like-minded transplants.
21. You Could Have to Work Part Time
Three in 10 workers expect to keep working, at least part time, past the age of 67, according to Gallup’s 2016 Economy and Personal Finance Poll.
Some older Americans recognize the physical and mental health benefits that come with keeping an active mind. Others simply can’t afford to retire. Whether you work past age 67 by necessity or by choice, one thing is for sure: The added income can always help boost your eventual retirement nest egg — no matter your age.
22. Your Adult Children Could Derail Your Retirement Plans...
Almost half of all middle-aged adults provided some or primary financial support to their adult children in 2012, according to the most recent data provided by Pew Research Center. For many Americans, middle age is also the prime income-earning age, and when, ideally, savers should have the most disposable income available to bolster retirement accounts. Financially funding a loved one during those years can have a serious impact on your savings strategy.
Benjamin Brandt, a certified financial planner with Capital City Wealth Management in Bismarck, N.D., suggested folding a Plan B option into a retirement plan. If you suspect your child might boomerang home, for example, “being proactive rather than reactive will always lead to better retirement outcomes,” he said.
23. ...And So Could Your Aging Parents
At the same time, one in five middle-aged adults provided financial support to an aging parent in 2012, according to Pew Research Center. Most adult children are unwilling to withhold support from a parent so, suggested Brandt, workers should plan ahead if they expect the possibility.
“If a client thinks it is likely they will care for a parent, they could build a contingency plan," he said. They could switch to part-time work earlier than expected, Brandt suggested, or perhaps even work longer if excess funds are needed more than excess time as a caretaker.
24. Or, You Could Be Sandwiched Between Both
Fifteen percent of middle-aged people are financially providing for both an adult child and an aging parent — at the same time, according to the Pew Research Center study. “This phenomenon is so common that it has a name: The Sandwich Generation,” said Brandt.
Seven in 10 sandwiched workers admit to barely having enough money to get by. That means that, by supporting loved ones, many are sacrificing their own ability to save for retirement.
25. You’ll Have to Talk to Your Kids About Your End-of-Life Care Decisions
No one wants to think about their own mortality, but, according to information available from the National Institute on Aging, it’s best to discuss end-of-life care preferences long before an illness ever occurs.
Consider the following: Whether you want to use life-prolonging measures; where you want to receive care; and what you want to happen if you’re physically unable to care for yourself. An ugly truth about retirement is that these are the years when these decisions need to be made, and it’s best to talk to your loved ones — and your doctors — about your wishes while you’re still in good health.
26. You'll Need to Discuss Your Wealth Transfer Plans
Even for people with a modest inheritance to pass down, it’s often difficult to initiate the money talk, especially when you’re not sure how your future heir will react to the news of an impending financial windfall. Some children feel guilt at the thought of an unearned financial boon and squander the funds. Others can misinterpret your intentions. “Did Dad love my sister more than me?” is an oft-heard phrase among children of the deceased.
To avoid misinterpretation, have a sit-down conversation with your future heirs so they understand the rationale behind your decisions and can start emotionally preparing long before they’ll need to.
27. You'll Need to Address Your Burial Plan
Many people are not comfortable discussing death, said Veronica Reyes, a funeral director at Cremation Society of Virginia in Richmond. Still, avoiding the topic can lead to bigger problems, particularly if left until your health is ailing. Poor decisions — both financial and strategic — can be made during times of emotional stress.
“Solidifying your burial or cremation arrangement plans now, with a cool and clear head, allows you to lock in a fixed price,” said Reyes. “Your loved ones will not have to worry about being burdened with confusing decisions and unexpected funeral costs.”
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.