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5 Hard-to-Believe Retirement Facts

5 hard-to-believe facts about retirement

If you’re worried about not having enough money to retire comfortably, you’re not alone: 70% of Americans share this concern. People know they need to save, but the details get fuzzy from there. How much should you have in your retirement account? How much should you save each year? How should you invest your 401(k)?

The answers to these questions are different for everyone, but accepting these five hard-to-believe facts about retirement will help you build an informed plan tailored to your specific goals.

1/ The average retirement amount should be $650,000.

Many people wonder how much they should save for retirement. There is no universal answer, which leads to poor education on the subject. When you stop working, the money coming in from Social Security, pensions or investments covers your living expenses. As pensions disappear, people are relying more and more on their own investments.

Unfortunately, dipping into your savings is risky: you can permanently deplete your money by spending too aggressively. That’s why financial planners developed the 4% rule. Historically, retirees could safely withdraw 4% of their retirement savings each year, while their investments earned dividends and interest. Low interest rates have prompted many advisors to revise this rule to 3%, which poses an even greater challenge to retirement planning.

The median retired couple has an annual income of $57,000, with $31,000 coming from Social Security. Investment income must cover the $26,000 gap. To stay within the 4% rule, $650,000 to $860,000 in retirement savings is needed (and that’s just to maintain a median income, assuming no taxes). This figure will also be higher for those retiring in the future, due to inflation.

Polls show that most Americans think they will only need about $300,000 to retire comfortably. Even more troubling: The average American over age 65 has only about $200,000 in retirement assets. That’s obviously not enough. The math is not right. You need to save and invest early in your career to be sure you’re covered in the future.

2/The average couple needs $300,000 in assets to cover medical expenses in retirement.

Medical expenses are different for everyone, but it’s common to incur most of these costs in later life. Medicare provides partial coverage, but you still have to pay many of these bills.

The $300,000 figure is, of course, an average estimate based on projected expenses and growth rates. That said, a retired couple can reasonably expect to spend that amount to meet all their lifetime medical needs. We have seen that most Americans believe they will only need $300,000 to retire comfortably. So it is unlikely that most people have budgeted enough for doctor visits, prescriptions and hospital stays.

3/ Your savings lose value over time

Inflation is a major threat to your retirement plan. The U.S. dollar loses purchasing power over time, with an average inflation rate of 3%. That number has been closer to 2% for the past 20 years, but there are signs that we are entering a period of higher inflation as the economy recovers from the COVID-19 pandemic.

This is a problem for people living on a fixed budget. Do you plan to live on $100,000 a year when you turn 65? That amount will be spent as if it were $75,000 by the time you are 75, assuming 3% inflation. The value of your assets can drop quite quickly, even if your account balance doesn’t.

Fortunately, there are strategies to combat inflation. Maintaining some exposure to stocks in your investment portfolio is a popular strategy, as stock prices rise with inflation and tend to grow over time. In your fixed-income portfolio, you may also want to consider using inflation-protected Treasury securities, whose value and interest payments adjust to inflation.

4/ You can’t keep all of your 401(k) savings

It can be scary to calculate the tax liability on your retirement account. The IRS allows people to defer taxes on contributions to qualified retirement accounts, such as 401(k), 457, 403(b) plans and IRAs. This money is invested and grows tax free.

However, the IRS will eventually get its due. Distributions from these accounts are taxed as ordinary income. Today, the average 65-year-old 401(k) plan holder has $216,000 in their account. Tax rates vary by state and change over time, but it is common for retirees to have an effective tax rate of 10% to 15%. It is realistic to expect the federal government to collect $30,000 from you over time. This figure could be even higher if tax rates are higher in the future.

5/ You need to plan for more than 20 years of retirement

Lifespans are longer than ever, thanks to medical advances. For a married couple who reach age 65, the average life expectancy of the longer-living partner is more than 20 years. It is common for at least one member of a retirement plan to spend 25 years traveling, eating out and paying for health care.

A 25-year retirement plan was inconceivable a few decades ago when pensions were popular, and this is one of the reasons pensions have lost popularity. Unfortunately, this means that individuals are left to fend for themselves. To combat the risks posed by longevity and inflation, retirees can:

Make sure they follow the 4% rule.
Maintain a balanced investment portfolio of stocks and bonds to provide growth in early retirement.
Consider purchasing an annuity product that provides guaranteed income for the annuitant’s lifetime.

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