As we age, our intentions regarding money evolve. When we’re young adults, we just want to earn money. Once we’re more established, we (hopefully) start thinking about saving money. In our later years, we get serious about wanting to ensure we have enough to live a comfortable retirement. Ideally that ‘saving money’ part should start much earlier, but the reality is, many Americans are woefully financially unprepared for retirement. According to a 2019 bankrate.com survey, 69% of working adults save 10% or less of their income for retirement. A surprising 21% don’t save any money at all! Yet experts suggest workers put away at least 10-20% of their income for their golden years.
In this special section on retirement planning, you’ll find a series of articles on what you can do NOW that will help ensure you have adequate finances to enjoy your later years without worrying about money.
you may not have planned for
When you’re living off your savings, unexpected expenses can undo years of diligent planning.
“Withdrawing an extra $10,000 for a new roof might not seem like much in the grand scheme of things, but it can really derail your plan—especially since those funds are no longer at work in the market,” says Rob Williams, managing director of financial planning at the Schwab Center for Financial Research.
When every dollar counts, your retirement spending plan needs to anticipate obstacles as much as possible. To that end, here are five common—yet unexpected—setbacks that can upend your retirement plan and how to better prepare for them.
Hidden housing costs
Nearly 80% of those ages 65 and older own their homes, according to the Joint Center for Housing Studies of Harvard University. However, many pre-retirees fail to look beyond their monthly mortgage payment when estimating their long-term housing costs. Research from the Society of Actuaries found that unanticipated home repairs are retirees’ single most common financial surprise. If you plan to remain in your home long-term, factor in potential costs or improvements such as creating wheelchair access or other disability-related alterations.
Uncovered health care
Even with Medicare, it’s no secret that health care can be costly in retirement. Many retirees believe Medicare covers more than it actually does. Original Medicare Part A covers hospital stays and Part B covers doctor visits. Other expenses and services such as dental, hearing, and vision care, as well as copays and prescription drugs—are covered only through supplemental plans, which cost extra. For more complete coverage, you can sign up for Medicare’s stand-alone prescription drug program (Part D); purchase a private Medigap policy to help cover deductibles, coinsurance, and copays; add private insurance to cover routine dental, hearing, and vision care; or buy a private Medicare Advantage plan, which bundles parts A and B and can include dental, hearing, and vision care.
The U.S. Department of Health and Human Services estimates that close to 70% of today’s 65-year-olds will require some kind of long-term care for an average of about three years, and the costs can be exorbitant. The national average cost for an in-home health aide in 2020 was $54,912, whereas a private room in a nursing home facility was $105,850.
Some retirees may turn to their families for help, but others generally cover these expenses in one of two ways:
Out of pocket: One approach is to pay out of pocket if and when the need arises, in which case you’ll need significant savings to cover such costs. The benefit of this approach is that you pay for only what you need, which may be attractive to wealthier individuals who don’t want to pay for insurance they may not use. Remember, too, that there’s often a financial cost for loved ones tasked to provide care, even if there’s not an explicit cost for private in-home or other care.
Long-term care insurance: For most people, coming up with an extra $100,000 or more isn’t realistic. Long-term care insurance may allow them to get the quality care they need without having to liquidate their assets to pay for it. It’s generally best to purchase a policy in your 50s or early 60s, assuming you’re still healthy and insurable, to lock in a more affordable premium.
A child in crisis
It’s natural to want to step in when your child needs financial help. But the older you are, the more difficult it can be to recover from such an unanticipated expenditure. In fact, half of all parents financially helping an adult child say it’s putting their retirement savings at risk. Before offering your support, think about how much help you’re able to provide—and for how long. “Are you willing to withdraw a large lump sum from your savings, or would you be more comfortable covering smaller expenses over a longer time frame while they get back on their feet?” Williams asks.
If you do decide to dip into your retirement savings, be sure to have an honest conversation with your child about the terms of the arrangement—including whether the money will be a gift or a loan—and be clear about the extent to which you’re willing to help.
Losing a spouse
There’s little you can do to prepare for the emotional shock of losing your spouse. But failing to prepare for it financially can leave you in a precarious position. Surviving wives, in particular, are more likely to face financial hardship, with about half reporting at least a 50% decrease in income after losing their spouses.
Take steps now to mitigate future risk:
The lump sum paid upon the insured’s death can help offset a loss of income—be it from a paycheck, a pension, or Social Security. Review your net worth statement, future cash flows, and goals to see if there are any significant gaps you may want to insure for your surviving spouse.
If you or your spouse is eligible for a pension, investigate survivorship options before you retire. Opting for survivor benefits may reduce your monthly benefit, but payments will persist even after you pass. Weigh your options with a financial planner to sort through how all your sources of income fit together—now and after a death.
Your surviving spouse is eligible to receive your Social Security benefit upon your death. If you’re the higher earner and not yet collecting benefits, it may make sense to delay doing so as long as possible. That’s because every year you delay past full retirement age (between 66 and 67 for today’s retirees) increases your benefit by 8% (up to age 70, past which there is no incremental benefit). Not only does this increase your benefit during your lifetime, but it also ensures the surviving spouse—whether that’s you or your mate—is left with the biggest possible benefit. Once one spouse dies, the survivor can collect reduced benefits as early as age 60 (50 if disabled), but waiting until full retirement age will ensure the largest payout.
Finally, make sure your estate plan is organized and up to date to help ensure a smooth transition of assets upon your passing. An estate-planning attorney can help you identify and correct any gaps in your plan.
“Working with a financial planner can help you anticipate potential problems and prepare you for surprises when they arise,” Williams says. “And the more prepared you are, the more confident you’re likely to feel as you transition to life after work.”
How To Survive Retirement
At one time, retirement rested on what financial professionals like to refer to as a three-legged stool – Social Security, savings, and a pension. That stool went wobbly though when most private-sector pensions began to disappear.
“Years ago, the idea was that your employer and the government would take care of you,” says Chad Slagle, a Registered Investment Advisor and president of Slagle Financial, LLC. “But those days are gone. Now the burden is on each individual to make sure they’re prepared for their own retirement. That’s why it’s important to have a game plan.” Slagle suggests there are a few steps anyone can take to survive today’s pension-less retirement.
Map out a retirement strategy.
Often, even people who stash away money for retirement don’t have a firm handle on what they’re trying to accomplish. Slagle says it brings to mind the old saying: “If you don’t know where you’re going, how will you know when you get there?” Having a strategy helps you know your ultimate goal and what you need to do to accomplish it. Once you develop a strategy, you also need to remember that conditions don’t always remain the same. Changes in your income and expenses, along with fluctuating market conditions, can all have an impact on your plan. Slagle recommends that about every three years you review and, if necessary, update your strategy.
Live within your means.
It’s difficult to save a comfortable retirement nest egg when you’re spending more than you earn and racking up debt. Create a budget and stick to it.
Don’t ignore the cost of health care in retirement.
Perhaps people just assume they will be healthy forever. Or maybe they just don’t think about this subject. Either way, too many don’t plan for or underestimate how much health care could end up costing them. So you need to work it into the equation.
Remember to account for inflation.
Just when you think you’ve saved enough – you haven’t saved enough. At least you didn’t if you failed to take inflation into account. The cost of living will go up. That means the value of the dollars you saved will go down. “You need to factor that in when you plan for your financial future,” Slagle says.
Prepare for the possibility of long-term care.
This is another cost that many people don’t plan for, but the necessity of long-term care is a reality at some point for 70 percent of people over 65. The average annual cost of a private nursing-home room is $77,000, so it’s unwise to overlook it, Slagle says.
“You need to start thinking about all this now, whether retirement is decades away or a few years away,” Slagle says. “The sooner you begin saving and planning, the greater the odds are that you’ll have a happy and secure retirement.”
Should you Pay Off Your Mortgage Before you Retire? Pros & Cons
If you’re like most people, paying off your mortgage and entering retirement debt-free sounds pretty appealing. It’s a significant accomplishment and means the end of a major monthly expense. However, for some homeowners, their financial situation and goals might call for keeping a mortgage while attending to other priorities.
Let’s look at the reasons why you might—or might not—decide to pay off a mortgage before you retire.
You might want to pay off your mortgage early if . . .
You’re trying to reduce your baseline expenses: If your monthly mortgage payment represents a substantial chunk of your expenses, you’ll be able to live on a lot less once the payment goes away. This can be particularly helpful if you have a limited income.
You want to save on interest payments: Depending on a home loan’s size and term, the interest can cost tens of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses. While it’s true you may lose the tax deduction on mortgage interest, you may still save a considerable amount on servicing the debt. You’ll have to reckon with a decreasing deduction anyway, as more of each monthly payment applies to the principal.
Your mortgage rate is higher than the rate of risk-free returns: Paying off a debt that charges interest can be like earning a risk-free return equivalent to that interest rate. Compare your mortgage rate to the after-tax rate of return on a low-risk investment with a similar term—such as a high-quality, tax-free municipal bond issued by your home state. While mortgage rates are currently low, they’re still higher than interest rates on most types of bonds—including municipal bonds. In this situation, you’d be better off paying down the mortgage.
You prioritize peace of mind: Paying off a mortgage can create one less worry and increase flexibility in retirement.
You might not want to pay off your mortgage early if . . .
You need to catch up on retirement savings: If you completed a retirement plan and find you aren’t contributing enough to your 401(k), IRA, or other retirement accounts, increasing those contributions should probably be your top priority. Savings in these accounts grow tax-deferred until you withdraw them.
Your cash reserves are low: You don’t want to end up house rich and cash poor by paying off your home loan at the expense of your reserves. Keep a cash reserve of three to six months’ worth of living expenses in case of emergency.
You carry higher-interest debt: Before you pay off your mortgage, first close out any higher-interest loans—especially nondeductible debt like that from credit cards. Create a habit of paying off credit card debt monthly rather than allowing the balance to build so that you’ll have fewer expenses when you retire.
You might miss out on investment returns: If your mortgage rate is lower than what you’d earn on a low-risk investment with a similar term, you might consider keeping the mortgage and investing what extra you can.
You need to diversify: Your house is just as much of an investment as what’s in your portfolio. And overconcentration carries its own risks—even when it’s in something as historically stable as a home. Maintaining your mortgage allows you to fund other asset classes with possibly more growth potential.
If you decide to pay your mortgage off before you retire . . .
Ideally, you would accomplish your goal through regular payments. However, if you need to use a lump sum to pay off your mortgage, try to tap taxable accounts first instead of retirement savings. If you withdraw money from a 401(k) or an individual retirement account (IRA) before 59½, you’ll likely pay ordinary income tax—plus a penalty—substantially offsetting any savings on your mortgage interest.
A middle ground
If your mortgage has no prepayment penalty, an alternative to paying it off entirely is to chip away at the principal. You can do this by making an extra principal payment each month or by sending in a partial lump sum. This tactic can save a significant amount of interest and shorten the life of the loan while maintaining diversification and liquidity. But avoid being too aggressive about it lest you compromise your other saving and spending priorities.
Have a plan where you can both invest and pay down principal on a mortgage before or early in retirement. You need not make an all-or-nothing decision.
Why Retired Women Are More Prone To
Men and women both face obstacles and challenges in planning for retirement, but women often travel a thornier path.
“In most cases, women have earned less than men over the years,” says Jeannette Bajalia, a retirement-income planner, president of Woman’s Worth® and author of Retirement Done Right and Wi$e Up Women. “They also have often stepped out of the workforce for several years for caregiving roles, whether to raise children or care for aging parents.”
Those years out of the workforce can mean fewer years contributing to a company 401(k) account and also can affect Social Security earnings potential.
Perhaps that’s why women feel less assured about how well they will fare in retirement than men. Just 55 percent of women are confident their retirement will be comfortable compared to 68 percent of men, according to an annual survey by the Transamerica Center for Retirement Studies.
Bajalia says three things can cause women to plunge even further into financial difficulties after they reach retirement.
Longevity. People live longer these days and women on average outlive men. That’s the good news. It’s also the bad news, Bajalia says, because many women are unprepared financially for a retirement that could stretch into two, three or even four decades. “Even if a woman has substantial savings, if you want to hold onto your wealth you need to hold onto your health,” she says. “So you need to build into your retirement planning the cost of health care, and not just routine and preventive care, but long-term care. And the cost of long-term care is skyrocketing.”
Widowhood. Because women live longer than men, odds are that most married women will reach a day when they become widows. Beyond the emotional turmoil that can create, there’s also financial turmoil. If both are drawing Social Security, one of those checks is going away. If the husband had a pension, that check could also disappear or be reduced. Often, the husband handled the finances. The wife might not even have known about all the investments or where documents are stored. That’s why it’s important for a couple to take the time to review their assets together so that both have a good understanding of what’s there and what’s needed for a secure retirement.
Divorce. Just like widowhood, divorce can cause a sudden drop in financial stability for older women. “When you’re in your 30s or early 40s, you have time to overcome some of the difficulties a divorce creates, but when you’re older that becomes more challenging,” Bajalia says. “I encourage women in this situation to get a ‘financial physical’ before a divorce is finalized to ensure they are protected with the strategies they need, and that those are included in the divorce decree.”
Despite that dreary outlook, Bajalia say there is reason for optimism – but it takes planning and finding a retirement planner who can help you with more than the money aspect of retirement.
“For women, it’s not just about the money, it’s about total well being,” she says. Ideally, you need a team of experts in estate planning, tax planning, financial planning and health care planning. “All of us would like to age with grace, dignity and respect,” Bajalia says. “To do that, you need to make sure you have the tools in place at an emotional, physical, spiritual, and financial level.”