For most of us born after 1960, retirement is ahead of us. And often it’s a big financial planning priority. Most of us in this age group want to stop working for money someday and be able to spend time, working or playing, at things we love. Even if those things don’t pay us money.
But a recent survey from Charles Schwab says that most folks are pretty confused about what retirement looks like and how to get there safely. Here are the top five areas of confusion:
ONE -- How much should I save?
More than four in 10 workers (41%) polled said they need help calculating how much money to save for retirement. In fact, a recent survey from Transamerica Center for Retirement Studies actually found that 45% of workers said they guessed the amount they need to save for retirement.
Regular readers will NOT be surprised that I think this is a great topic to discuss with an experienced, highly-trained, CERTIFIED FINANCIAL PLANNER™ professional and Behavioral Financial Advisor. A financial planner who is an advocate for his clients ALL THE TIME – a fiduciary financial planner provides guidance based on your best interest, not commissions or sales quotas. I think it’s the best way to serve clients and I am thrilled to work this way all the time.
If you would like to talk about your situation, I love to meet new people. So, follow this LINK to find a time for us to have a get-acquainted visit.
But, if you want to do it yourself, you can also check out some great retirement calculators at these links AARP, Bogleheads, Fidelity, Schwab, or Vanguard.
TWO -- What should I invest in?
Most folks have plenty of choices for retirement investments. Which is the problem. The average employer 401(k) plan has more than 17 mutual funds to choose from and some offer company stock as well, according to the "How America Saves 2023" report by Vanguard.
Humans don’t do well with lots of options. The Schwab study shows that 4 in 10 workers said they want help on how to invest their 401(k), while almost three-quarters said personalized investment advice for their 401(k) would ease their fear of making the wrong choices.
For the record, a fiduciary planner can work with you on the investment options in your work savings plan. And as a fiduciaries, they are working for your best interests, not for the profits of the funds in the plan. Ask me more about it at this LINK. We can find a time for us to have a get-acquainted visit.
THREE -- When should I retire?
About four in 10 workers (38%) are flummoxed when it comes to figuring out what age they will be able to afford to retire. This calculation is tricky and riddled with variables like, how healthy will you be as you age. How healthy will your spouse and family be? How much help will your parents need from you as they age?
According to a survey by the Employee Benefit Research Institute (EBRI) and Greenwald Research that polled 1,320 workers and 1,217 retirees online in January, there is a big gap between when active workers expect to retire and when retirees say they actually did.
- Workers continue to report an expected median retirement age of 65, while retirees report they retired at a median age of 62.
- One in three (33%) workers expect to retire at 70 or beyond or not at all, while only 6% of retirees do so, according to EBRI’s research.
- Just 11% of workers say they plan to retire before age 60, compared with 33% of retirees who retired that early.
One good way to get a read on what age you MIGHT be able to retire is to pull up that online retirement calculator and take a stab at a rough estimate.
FOUR -- How do I create an income stream in retirement?
Today, most of us will retire depending on savings as a big part of our retirement income. Very few folks get a monthly pension as part of the retirement income stream. And for most of us, the idea of no more paychecks hitting the checkbook is pretty scary. In fact, more than a third (36%) of workers say they need help figuring out their income stream in retirement.
Traditional counseling says not to spend more than 4% of your retirement savings in the first year to protect yourself from going bust in your golden years. You can tweak that percentage annually depending on your circumstances.
The 4% distribution rule is only a starting place. There are tons of variables. To get a handle on your specific situation, it’s smart to talk with your fiduciary financial planner. If you would like to talk with me, I love to meet new people. So, follow this LINK to find a time for us to have a get-acquainted visit.
FIVE -- How can I know what my expenses will be in retirement?
A sizable 34% of those polled by Schwab are throwing their hands in the air when they try to get a grip on what they might expect their expenses to be in retirement. And that’s understandable.
Retirement experts say folks typically need about 70% to 80% of their current income in retirement. But this assumes that you are saving 20% to 30% of your income into retirement while you work. Some save more, some save less. So, I often tell clients to look a little more granular look at the monthly tally.
Pull recent credit card and bank statements and review where your money is going today. Ask yourself, “How many of those things will I NOT do in retirement?”
Healthcare costs are likely to be a bigger chunk of your budget than you might anticipate.
About 15% of the average retiree's annual expenses will be health-related, per Fidelity. The after-tax cost for medical expenses throughout retirement for a single, 65-year-old retiree is $157,500 ($315,000 for the average retired couple at the same age), according to Fidelity’s 2023 Retiree Health Care Cost Estimate, which tracks retiree healthcare expenses annually.
There are ways to help prepare now to meet those future cost challenges such as a health savings account (HSA), which allows investors to contribute, invest, and withdraw money tax-free when used for qualified medical expenses. If you use your HSA money on something other than qualified medical expenses, your withdrawal will be subject to income tax, plus a 20% penalty. At age 65 and older, you can take penalty-free distributions from the HSA for any reason. However, in order to be both tax-free and penalty-free the distribution must be for a qualified medical expense.
HSAs are not an option for everyone. Some workers do not have access to this type of account at their jobs. And HSAs are linked to high-deductible health insurance plans which don’t work for every family.
Yes, I am a CERTIFIED FINANCIAL PLANNER™ professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.