Approximately 10,000 “baby boomers” are set to retire each day until 2030, and while the ideal is that you can retire comfortably, the reality is often different. Research suggests that millions of Americans are under prepared for retirement. Grave misconceptions about spending and saving are the main culprits, although there are other issues.
1. You Need Much More Than You Think
If you wish to retire comfortably, you need to take into account a variety of things, including mortgage repayments, health care costs, and day-to-day spending. Clearly, the amount you need to save depends on your lifestyle and circumstances. However, as a rule of thumb, financial experts suggest that you require approximately 80 percent of your pre-retirement income.
The average American retires at 63, and the average length of retirement is 18 years.You must plan for an even longer spell, especially if you have a history of good health. In most cases, it is prudent to plan for a 30-year retirement. According to Motley Fool, you need $1.06 million in savings to draw a pension of $5,000 a month for three decades. This assumes two percent inflation and six percent annual investment returns.
Alas, the vast majority of the population is wholly under prepared for retirement from a financial perspective. The average 50-year old has just over $42,000 saved, while 80 percent of those in the 30-54 range believe they will not save enough.
The main reason why you can survive on a lower income in retirement is because certain expenses should go down. Examples include the cost of commuting to and from work, and, if you’re fortunate, no mortgage repayments to consider. However, health care expenses will increase in retirement, and there is the matter of maintaining the home. Older properties require more upkeep, so expect to pay up to $1,000 a month on maintenance for a property worth $300,000.
Above all else, don’t forget the cost of entertainment. You have worked hard for your entire life, so you deserve to spend money enjoying yourself. Set savings aside to embark on an old (or new) passion, as well as cash for traveling; it is important to have things to look forward to in retirement.
2. You Cannot Rely on Social Security
The purpose of Social Security is to help retirees, but it will not support the needs in retirement fully. According to the Social Security Administration (SSA), the benefits can replace up to 40 percent of your income, but since most experts agree that 80 percent is the magic figure, Social Security falls short.
Given this information, it is shocking to learn that 59 percent of Americans rely heavily on Social Security while 36 percent are completely dependent on it. Even worse, Social Security is running out of money and will only cover 77 percent of benefits from 2034 onward.
However, it isn’t all bad news, as it is possible to enhance your monthly benefits with careful planning. Social Security benefits relate to your highest 35 years of earnings, and you are entitled to full benefits once you reach retirement age provided you meet the qualifying criteria. Savvy retirees know that delaying their claim beyond their retirement is a lucrative strategy. For each full year you wait beyond the date of entitlement, you receive an eight percent increase until the age of 70. For instance, delaying the collection of benefits for three years turns $1,600 a month into $1,984.
3. You Can Work Longer
There is no longer a stigma attached to elderly employees, and many companies are happy to allow a long-standing employee to continue working beyond his or her original retirement date.
While the last thing you want is to work for 40+ years only to discover you have not saved enough, you’ll be amazed at what working an extra year or two could do for your bank balance. At the time of writing, workers aged 50+ can contribute a maximum of $24,000 per annum to their 401(k) account. If you max out your 401(k) contributions for just one extra year beyond retirement, you’ll benefit from an additional $1,200 per annum for the next 20 years.
As a bonus, working longer could potentially extend your life expectancy.According to a study by Oregon State University, healthy individuals who worked until they were 66 had an 11 percent lower risk of death compared to healthy people who retire at 65.
There are few bigger decisions you’ll make in your life than the day you elect to retire. Hopefully, you have a lot to look forward to in your golden years. However,to enjoy the fruits of a lifetime of labor fully, make sure you have your financial affairs in order.