How to Overcome Your Fear and Enjoy Retirement

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last updated 27 December 2023

While not as terrifying as aerophobia (fear of flying), as common as nomophobia (fear of being without your phone) or as unnerving as coulrophobia (fear of clowns), fear of retirement is a real phenomenon for millions of older Americans.

If you’re behind on saving, the fear is probably warranted. But even if you’ve accumulated a substantial nest egg, the thought of going without a regular paycheck may be scarier than a roomful of circus clowns.

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Given the increase in longevity, it’s not surprising that Americans are working longer, but the motivation to stay on the job isn’t necessarily financial. A survey by Hearts & Wallets, a research firm, found that nearly 20% of respondents between 65 and 74 with investment assets of between $2 million and $5 million were still working. “Whether households are retired or not has very little to do with investable assets,” the report said.

Emshwiller works four to five hours a day in the neurosurgery unit, which she requested because she had experience working there. On a typical day, she’ll meet with new nurses to discuss physical therapy, diet and other recommendations for patients in their care. She chooses which days she wants to work. As for retiring a second time, “I haven’t even thought about it,” she says. “I love what I’m doing so much.”

Only a handful of companies have implemented formal phased-retirement programs. Instead, the arrangement is usually done on an ad hoc basis, with employers more inclined to offer it to workers who have specific skills or experience they value. Snyder says many of his clients who worked for Indianapolis-based Eli Lilly continue to consult for the pharmaceutical company after they leave their jobs.

If you’re interested in phased retirement, start the conversation with your employer well before you plan to make the shift. Point out how the arrangement will benefit the company. Make sure you and your employer have a clear understanding of how many hours you’ll work, says Chris Pollard, a CFP in Goshen, N.Y. That’s particularly important if you’re the type of worker who arrives early and stays late. “You don’t want to become a full-time employee at half the pay,” he says.

Currently, employers are required to allow part-time employees to contribute to their retirement plan after they’ve worked at the company for at least 500 hours a year for three years, or more than 1,000 hours for one year. Starting in 2025, the eligibility threshold will decline to 500 hours a year for two years. But there’s nothing to prevent your employer from allowing you to contribute to your retirement plan, even if you work fewer hours than that.

For many workers, one of the most unsettling aspects of retirement is giving up the security of a paycheck. A regular paycheck allows you to put your finances on auto-pilot, with funds deposited directly into checking, retirement savings and other designated accounts. Many workers also set up automatic bill payments, which can help you determine how much you’ll have left over each month and whether you’ll need to cut spending.

For this strategy to work, you need to figure out how much money is required to cover the basics, such as utilities and food, and extras, such as travel and extracurricular activities. To help his clients make an accurate estimate, Snyder has them fill out a worksheet that lists everything from mortgage payments to haircuts. After you have a handle on what you usually spend, you can decide how much to withdraw from your savings, with the understanding that you can adjust that amount as your lifestyle changes.

You’ll need to rebalance your portfolio periodically to make sure you have enough in your cash “bucket” to cover your expenses. Ideally, you want to have two years’ worth of expenses in a low-risk account, such as a bank savings or money market account — which is another reason to come up with a good estimate of how much money you need to live on (see below for more on how to use the bucket system to invest funds in your retirement portfolio).

If this exercise seems daunting and you’re still a year or two from leaving your job, try living for a few months on the amount you think you’ll need after you retire. Snyder says this exercise often eases the transition to retirement. If one spouse has retired and the other is still working, you can also try what Snyder calls “staggered retirement” — living on one income to see how much of your expenses that will cover.

Laura Jansen, a CFP in Scottsdale, Ariz., uses a similar strategy for clients who are reluctant to take the leap. In the months before their planned retirement date, she transfers an amount equivalent to their paycheck from their investment account to their checking account. “Seeing the money physically appear in their checking account gives them the confidence that they can continue to pay their bills without their day job,” she says.

Annuities come in many flavors, with varying degrees of complexity. This has given rise to abuses and chicanery, with some sales agents persuading senior citizens to buy products with high commissions and hefty surrender penalties. But in recent years, a growing number of companies have developed commission-free annuities. Because the annuities have no commission, certified financial planners can offer them to clients without violating the fiduciary rule, which requires them to put clients’ interests above their own.

For example, a fixed-index annuity provides returns linked to a specific index, such as the S&P 500. Instead of investing your money directly in stocks, though, insurance companies invest most of it in fixed-income investments and use options to provide the potential for higher returns. In exchange for protection against losses, fixed-index annuities limit how much you earn. If your contract has a cap of 6% over a specific period, for instance, you’ll earn a maximum 6% rate of return, even if the S&P 500 index rises 20% during that same period.

Fixed-index annuities (along with other types of annuities) typically come with a rider that allows you to convert your account to a pension-like stream of income. This feature, known as a guaranteed lifetime withdrawal benefit (GLWB), provides a guaranteed payout from your annuity each year for the rest of your life — or, depending on the rider, for the rest of your life and your spouse’s life — even if the account balance falls to zero. The rider usually costs between 1% and 1.5% of assets.

An option with fewer bells and whistles than a fixed-index annuity is a fixed annuity. In this case, you give an insurance company a lump sum in exchange for a guaranteed interest rate for a set period. A multiyear guaranteed annuity is a type of fixed annuity that pays a guaranteed rate for three to 10 years. Some three-year versions of these annuities are paying a 6% rate, compared with a rate of 4.5% to 5% for the top-performing 3-year certificates of deposit (CD). Interest is tax-deferred until it is withdrawn.

For some time now, financial planning experts have recommended annuities to retirees who are legitimately concerned that they’ll run out of money. But the products could also appeal to retirees with well-funded nest eggs, Lau says, because it allows them to invest their savings more aggressively than they otherwise would. If your annuity covers basic expenses, he says, you don’t have to worry about selling your stocks or stock funds in a down market to pay the bills.

The first is a liquid account designed to cover living expenses for the next year or two, after accounting for a pension and Social Security. The second bucket holds money you’ll need over the next 10 years; it can be invested in short- and intermediate-term bond funds. The third bucket holds money you won’t need until much later, so it can be invested in stocks, stock mutual funds or exchange-traded funds, or even alternative investments, such as real estate or commodities.

Still, although investing in these types of low-risk accounts may help you sleep at night, your returns will lag inflation, and that will reduce your purchasing power over time. Filling your first bucket with an annuity that provides guaranteed income will offer the same protection while providing a higher rate of return, Lau says. When you buy an annuity, the insurance company pools your money with that of other investors, and funds from investors who die earlier than expected are paid out to those who live longer. These “mortality credits” allow insurance companies to provide a higher yield than you’d get from similar fixed-income investments.

Although you can come up with a reasonable estimate of your living expenses in retirement, it’s difficult to predict how much you’ll spend on health care, especially in your later years. Once you turn 65, you’ll be eligible for Medicare, but you’ll still be on the hook for a variety of costs, including Medicare premiums, co-payments and deductibles. And, significantly, Medicare doesn’t cover long-term care, whether it’s in your home or at a nursing home or assisted-living facility.

A 65-year-old couple will spend $315,000 on health care in retirement, excluding long-term care, Fidelity Investments estimates. What you end up spending will depend on a variety of factors that are hard to predict when you’re in your sixties or even seventies. Though it’s not difficult to envision a worst-case scenario in which years in a nursing home deplete your savings, “it’s not very likely,” says Carolyn McClanahan, a physician and CFP based in Jacksonville, Fla.

Long-term-care insurance is one way to cover these expenses, but premiums are pricey — especially if you’re in your sixties, because premiums rise as you age. The average annual premium for a 65-year-old couple is $3,750 for $165,000 of coverage for each spouse, according to the American Association for Long-Term Care Insurance. If the policy includes an annual inflation adjustment of 3% — which seems prudent, given the rise in health care costs — the premiums average $7,150 a year; with a 5% annual adjustment, the average annual premium jumps to $9,675. And there’s no guarantee those premiums won’t rise in the future as health care costs continue to increase.

You don’t necessarily have to sell your home to tap that equity, either. If you want to remain in your home, a reverse mortgage could provide the funds you need for in-home care. You must be at least 62 and either own your house outright or have paid off most of the mortgage to qualify for a reverse mortgage. In 2024, the maximum you can borrow using a federal Home Equity Conversion Mortgage, the most popular type of reverse mortgage, is $1,149,825. You can take a lump sum, open a line of credit to tap whenever you choose, or receive monthly payouts — or you can choose a combination of those options.

Contributions are pretax (or tax-deductible if you’re self-employed), the funds grow tax-deferred, and you can take tax-free withdrawals for a variety of medical expenses. You can’t contribute to an HSA once you sign up for Medicare, but you can use money in the account to pay for your out-of-pocket medical costs, including long-term care. To qualify for an HSA, you must be enrolled in a high-deductible health plan, which in 2024 is defined as one with a deductible of at least $1,600 for single coverage or $3,200 for family coverage.

With this type an annuity, as with an immediate annuity, an insurance company will provide you with monthly income for the rest of your life in exchange for a lump sum. In this case, though, you choose when the payments will start — at age 80, for example. Some retirees invest in deferred income annuities (DIAs) to ensure they won’t run out of money in their later years, but a DIA can also provide guaranteed income for long-term care.

Because payments start much later than they do with an immediate annuity (and some policyholders die before payments begin), the payments are considerably higher than those for immediate income annuities. For example, a 65-year-old man who invests $100,000 in an immediate annuity will receive about $607 a month, compared with $2,458 a month if he purchases a deferred income annuity that starts payments when he turns 80.

You can invest up to $200,000 from your IRA or 401(k) account in a type of deferred income annuity known as a qualified longevity annuity contract (QLAC) without having to take required minimum distributions when you turn 73. The taxable portion of the money you used will still be taxed when you start receiving income from the annuity. But the tax bite will be delayed if you postpone receiving income from the QLAC until you’re in your mid seventies or eighties.

Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.