Mapping out your retirement strategy? Be sure to address these top retirement concerns!

Outliving your retirement savings

If you’ve ever wondered whether you’ll have enough money to enjoy retirement, you’re certainly not alone. According to a recent SeniorLiving.org study, nearly half of older adults (ages 55+) claim their biggest fear is running out of money in retirement. The fact that we’re generally living longer—and thus need to save even more money—only exacerbates these concerns.

You can thankfully take several actions here, many of which we’ll outline shortly, and an annuity is yet another option to consider (though not covered in this post)—especially when you’ve maxed out all other retirement vehicles. An annuity is an insurance product that provides investors with a guaranteed income stream during retirement, whereby you pay money upfront (via a lump sum or series of payments) that is then invested and later paid out per an agreed-upon time, amount, and timeframe.

Furthermore, various income-generating investments can also help grow your nest egg. A few examples include dividend-yielding stocks, preferred stocks, and bonds.

Paying for healthcare

According to a recent Fidelity report, the average couple would need to spend almost $315,000 in today’s dollars to cover medical expenses during retirement. Even more daunting? This estimate doesn’t account for long-term care, with some studies reporting median nursing home costs ring in at well over $100,000 a year!

One option to consider if you’re eligible is a health savings account (HSA), which you can use to pay for qualified out-of-pocket healthcare expenses including deductibles and copays.

Health savings accounts are also generally triple-tax advantaged in that you can make pre-tax contributions (or claim tax deductions if you make after-tax contributions), the amount in the account can grow tax-free (other than in California, New Hampshire, New Jersey, and Tennessee), and you can use the money to cover qualified expenses in the absence of taxes.

You aren’t required to spend your HSA account balance every year, as any leftover money automatically rolls over to the next one, and your HSA funds will continue to do so annually and remain in your account indefinitely until used.

You’ll also need to plan for long-term care (LTC), defined as help you may need with “activities of daily living” (or ADLs) due to injury, health, or cognitive impairment such as dementia, memory loss, or Alzheimer’s. Such activities include bathing, dressing, eating, toileting, continence, and transferring (walking or moving oneself from a bed).

According to the U.S. Department of Health and Human Services, someone celebrating a 65th birthday today has an almost-70% chance of requiring some form of long-term care (LTC) services in his or her remaining years. What’s more, women are expected to need 3.7 years of care compared to 2.2 years for men, and an estimated 20% of today’s 65-year-olds will require care for longer than five years.

Based on this data alone, long-term care expenses will likely impact your retirement plan—so you’ll need to plan accordingly and should definitely check out our article on long-term care funding options.

Paying off debt

Debt is a constant source of stress for so many retirees, and carrying too much of it into retirement can place additional strain on any fixed income: forcing you to cut back and adjust the budget you’ve become accustomed to over the years if you fail to get it under control.

One of the smartest moves you can make in this respect is to pay off your mortgage. Given that housing is the biggest monthly expense for retirees overall, you could enjoy some significant savings by paying this off more quickly and thus redirecting your money toward other retirement essentials. One recent Harvard University study reports that nearly half of homeowners aged 65-79 are still paying off a mortgage—so act sooner rather than later in this regard!

Deciding when to claim Social Security benefits

For many who rely on Social Security income as a primary source of income during retirement, this decision is perhaps a bit more straightforward in that they’ll likely collect upon first becoming eligible (age 62).

If you can delay your claim, however, you’ll avoid leaving lots of money on the table; while you can collect benefits as early as age 62, you’ll receive a more robust amount (about 7% higher) for each year you wait until reaching your full retirement age (when you’re first entitled to your full Social Security benefits). If you wait even longer, this number ticks up to approximately 8% for each year between your FRA and age 70.

To illustrate, let’s assume your full monthly Social Security benefit is $2,000: the amount you’d receive if you wait until your full retirement age. If you claim benefits at age 62, however, this number drops to $1,400 (approximately 30% lower). As you can see, collecting too early means you could miss out on thousands of dollars a year that can help cover retirement-related expenses such as housing and healthcare.

Eliminating unnecessary risk from investments

Taking on more risk in your investment portfolio is perhaps tempting, as your Social Security benefit or pension is likely less than what you need; but remember there’s also a downside to doing so. If the market crashes, so too can your retirement dreams.

A recent Fidelity report claims that 37% of Baby Boomers have more stock exposure than they should. As your investing strategy should generally grow more conservative when you turn 60, this means investing less in stocks—which are often extremely volatile. If there’s a significant (and prolonged) dip in the stock market, you may lack the luxury of awaiting a market bounce-back to recoup your money and your financial stability could thus face a severe risk during retirement (as you may be unable to withdraw money at the same rate you had planned).

While everyone’s situation is of course unique, the general rule of thumb is to subtract your age from 100 (110, as a more conservative option) when allocating your investment options. The resulting number should reflect the percentage of stocks in your portfolio, with the remaining investments comprised of bonds and CDs.

Saving enough money

According to a recent Employee Benefits Research Institute survey, the majority of retiree respondents (70 percent) would advise altering savings habits by saving or investing more and/or earlier. Why? Because retirement is expensive! You must therefore not only determine how to afford retirement but also ensure you don’t outlive your retirement savings.

While individual situations vary, a common rule of thumb is 70 to 90% of pre-retirement income is necessary to maintain a preferred standard of living during your golden years. For example, if you earn $100,000 a year before retirement, you’ll probably need to live on $70,000–$90,000 annually during retirement. While this number may seem high (and it just might be!), keep in mind the latest U.S. Bureau of Labor Statistics Consumer Expenditure survey reports the average retiree household (led by someone age 65 or older) spends $57,818 per year.

If you’re age 50+ but didn’t save enough money for retirement when you were younger, you’ll be happy to know the IRS established rules to help make up for this shortfall via “catch-up contributions”: additional contributions you can make to your 401(k) and IRA accounts above the standard limits.

Avoiding Medicare mistakes

A recent Harris Poll survey reports that more than 7 out of every 10 participants over age 50 wish they had a better understanding of Medicare coverage. This statistic alone shows that Medicare is a complicated program to digest!

To make matters even worse, some Medicare mistakes are costly. For example…

·      While specifics vary from state to state, if a Medicare Supplement plan (also known as a Medigap policy) is right for you, keep in mind that insurers who offer such policies cannot deny you coverage or charge you more for any preexisting condition when you first enroll in Medicare. However, adding a Medigap policy outside of your initial seven-month enrollment period may cost you more overall. Even worse? Insurers can deny you coverage based on your health status.

·      You may be on the hook for Medicare surcharges (known as “IRMAA”) that can tally a few hundred dollars a month for Medicare Parts B and D if your income exceeds certain thresholds. This surcharge is calculated based on tax returns reported from two years prior: meaning your 2024 income determines your IRMAA in 2026, your 2025 income determines your IRMAA in 2027, and so on. For those unfamiliar with IRMAA, the two-year lag can create unpleasant surprises when you first enroll in Medicare.

As you can see, it certainly behooves you to grasp how this government program works. Kickstart your research by reviewing our library of Medicare articles.

Ensuring inflation won’t derail your lifestyle

For many, a short-term inflation cycle is perhaps not a top concern. However, if you ultimately live on a fixed or limited budget in retirement (like so many of us), inflation becomes much more significant. Compounded with the fact that we’re living longer and spending a larger portion of our lives as retirees, our exposure to several inflationary cycles will only grow in the years to come.

While managing costs during retirement (e.g., paying off debt early) and optimizing Social Security benefits are two approaches in this regard, a third common approach to combating inflation is developing a retirement income strategy.

In doing so, think through your sources of income during retirement and create predictable income streams with what you have. Though it may add risk, it may make sense to maintain a decent stock allocation to help keep up with inflation as equities have higher returns historically. Additional investments to consider are Treasury inflation-protected securities (TIPS) and annuities indexed per the inflation rate.

Unexpected home repairs and renovations  

Whether you want to remain in your current home as you get older or move into a brand-new residence, you’re unlikely to avoid some type of home repairs and/or renovations either way. Not saving or budgeting enough to cover such expenses is a common regret among retirees; after all, even a new home isn’t immune to accidents and/or weather damage homeowner’s insurance may not cover.

Also remember that most homes aren’t designed with old age in mind. Therefore, if you require wheelchair accessibility or need to expand a bathroom or convert existing space so key areas exist on one level, expenses can quickly add up.

No singular rule governs how much to set aside, especially since so many variables are in play—including the age of your home. A good rule of thumb, however, is to earmark at least one percent of your home’s value every year (e.g., if the value of your home is $500,000, aim to save at least $5,000 annually).

Getting acquainted with RMDs

If you’re using a 401(k) or traditional IRA to save money for retirement, be sure to familiarize yourself with annual required minimum distributions (RMDs): the minimum amount of money you must withdraw from specific retirement accounts such as 401(k)s and traditional IRAs beginning at age 73. Starting in 2033, this stipulation will climb to age 75.

Those impacted are required to take their RMDs by December 31 of each year, but a few different options are available with respect to doing so for the first time. For example, if you turn 73 in 2024, you can either take your first RMD by December 31, 2024 or April 1, 2025. Just know that no matter which option you choose, you must take your second RMD by December 31, 2025. A failure to take your RMD by the deadline can trigger as much as a 25% penalty tax on the amount not withdrawn.

Examining tax implications within your retirement accounts

While some of your expenses may disappear in retirement, taxes most definitely won’t. If you collect Social Security benefits, take distributions from a 401(k) or traditional IRA, earn a paycheck from a pension, and/or even generate investment income, you’ll likely pay taxes as these sources count as income for the year in which you receive them.

How much you’ll pay ultimately depends on various circumstances, with your location ranked as a top factor in this regard. If you’re like many Americans who’ll rely heavily on Social Security during retirement, avoid living in states that tax these benefits if at all possible—as every dollar counts. States that impose some form of Social Security taxes include Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont.

In sum: top retirement concerns to prepare for

While it’s impossible to prepare for every scenario under the sun, lacking a plan of action for these top 11 concerns can easily dim the otherwise bright prospect of your retirement; so strategize accordingly!

Want to know if you’re on track for retirement? Check out our “Am I on Track?” service offering.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.

Fixed and variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59½ are subject to a 10% IRS penalty tax, and surrender charges may apply. Variable annuities are subject to market risk and may lose value. Riders are additional guarantee options available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges, and restrictions, and policy holders should review contracts carefully before purchasing. All guarantees are based on the claims-paying ability of the issuing insurance company.