There is a simple and unsettling reality in the United States. Most Americans are not financially prepared for retirement.
Some are completely unprepared. The Employee Benefits Research Institute (EBRI)’s 2020 Retirement Confidence Survey found almost half (41 percent) of workers have less than $50,000 in personal savings and investments, and about 18 percent has less than $1,000.1
Many are better prepared. Slightly more than half of survey participants were actively saving for retirement. However, not many had taken other steps to prepare such as:1
- Gauging monthly retirement income needs (44 percent)
- Thought about how they will occupy their time in retirement (49 percent)
- Planned on how to cover a big expense in retirement (38 percent)
- Thinking about how to cover retirement health care expenses (36 percent)
- Determined if they will continue to work in retirement (36 percent)
- Talking with a financial advisor about selecting investment options within workplace plan (28 percent)
- Considered leaving money to a charity (9advi percent)
It is relatively unsurprising to learn people who are most confident about retiring have spoken with a professional financial advisor about retirement planning.1
While working with financial advisors may improve retirement outcomes, saving is critical for anyone who wants to retire from working full-time. In fact, the majority of workers and retirees participating in a recent Wells Fargo survey wish they had begun saving for retirement sooner than they did.2
Factoring in the healthcare variable
No matter when individuals begin to save or how much they’re setting aside, even sound retirement plans can be disrupted by rising debt, healthcare costs and catastrophic illness. According to the EBRI 2020 report, roughly half of all workers say debt has had a detrimental impact on their ability to save more for retirement. There is also evidence Americans are concerned about healthcare issues, as respondents to the EBRI study rated Health care as the second most critical issue facing America today behind the economy. However, many have not accurately factored health care expenses into their own retirement plans.
According to a recent Wells Fargo survey, “Nearly half of workers (45 percent) have not actively considered health care expenses for retirement planning, and even among workers age 60+ nearly a quarter (23 percent) have failed to take healthcare expenses into account.”2
It’s daunting to consider health expenses have increased faster than inflation in recent years. In addition, patients are being asked to pay a larger share of the expense. From 2016 through 2025, health care spending was expected to grow by 5.6 percent a year, on average.3
Retirees can feel the effects of higher healthcare costs more than younger Americans do. A 2019 Fidelity Investment’s study, Retiree Health Care Cost Estimate, show that a retiring couple last year would need to have about $280,000 to cover the costs of health care in an average retirement. 4
Moving toward a comfortable retirement
If thinking about retirement makes you a bit queasy, it’s likely you haven’t prepared as well as you should. The good news is developing and implementing a retirement plan is fairly straightforward. Here are a few steps that can help boost retirement confidence:
- Create a retirement budget. A retirement budget is no different than a current household budget. Write down (item by item, line by line) how much you expect to spend in retirement. Obviously, these estimates will become more accurate as retirement nears. Another short cut could be to estimate that you will need roughly 70-80 percent of your pre-retirement spending once you are in retirement. This can be a good way to quickly gauge what you might need in retirement.
- Save for retirement. For many people, a successful retirement strategy means saving at least 15 percent of their income.5 Those who have the good fortune to participate in an employer’s retirement plan may benefit from employer-matching contributions. If you don’t have a retirement plan at work, open an IRA and set-up automatic contributions each pay period. Remember, the earlier you can start to save and invest the better.
- Choose an asset allocation strategy. Asset allocation is dividing your savings among different investments, such as stocks, bonds, and other options. Allocation should be to some degree tailored to your individual needs and risk tolerance levels. Ultimately, the way people invest their savings is often determined by their age, risk tolerance, and retirement goals.5 Allocation should be to some degree tailored to your individual needs and risk tolerance levels. However, asset allocation is not the only factor that should be considered. You also need to consider asset location, where assets are held when investing for retirement.
- Prepare for long-term care. Long-term care is one of the biggest unfunded liabilities facing retirees today. Roughly 70 percent of retirees, those over age 65, will need extended long-term care. 7 If you haven’t planned for it, the cost can really put a dent in your retirement savings. Medicare Part A covers skilled nursing care in a skilled nursing facility for a specific period of time after hospitalization. It does not pay for custodial care for Alzheimer’s or other cognitive illnesses. Consequently, it may be wise to purchase long-term care insurance or add a long-term care rider to a life insurance policy.6 But, whatever you do, you need a plan in place for long-term care expenses.
- Review your plan every year. Retirement planning is not a static activity. Retirement goals may change significantly over a lifetime. As a result, it’s important to review retirement plans often and make any changes needed.
Will you be able to retire comfortably? It’s a complicated question. The answer can be equally complicated. If you would like help figuring it out, or want to review your current plan, contact your financial professional.