Millions of Americans risk not being ready for retirement. Like Kryptonite to Superman or Achilles' tender heel, one issue is weakening retirees' retirement preparations. That troubling news comes from a retirement readiness study conducted by IRALOGIX, a technology company specializing in IRAs.
The IRALOGIX Retirement Readiness Index (IRRI) surveyed pre-retirees and asked them 20 questions to assess their readiness for retirement. The questions spanned five key areas: healthcare, savings and investments, lifestyle and spending, economic and policy confidence and emotional well-being.
The index revealed a national retirement readiness score of only 45.8 out of 100; scores below 50 are in the "Moderate Risk" zone. In a press release regarding the data, IRALOGIX explained the average score indicates that "many pre-retirees may face uncertain futures without adequate savings, healthcare coverage, or financial confidence to sustain themselves through retirement." So, why are Americans falling so short in retirement readiness, and what can be done about it?
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Why most Americans have low retirement readiness
Americans are falling short of the ideal scores in three key areas:
- Healthcare readiness
- Savings and investments
- Lifestyle and spending
However, healthcare readiness was the worst category, with Americans earning just 6.3 out of a possible 15 points in this category. Key gaps included a lack of understanding of how Medicare works, the absence of a plan for covering healthcare emergencies, and a lack of preparedness for chronic illness.
"Americans are unprepared for the costs of healthcare in retirement because people are living much longer lives," warned Steve Azoury, ChFC® and owner of Azoury Financial. "The longer you live, the more care you’ll likely need. Healthcare in retirement has become extremely costly, and many Americans don’t think about it when they’re younger."
Long-term care (LTC): The retirement Achilles' heel
John Gillet, CEO and founder of Gillet Agency in Hollywood, Florida, says many pre-retirees are understandably caught off guard by healthcare expenses. It's challenging enough to plan for routine spending, he explains, much less for one of the highest costs of all: the potential need for nursing home or home care. The proverbial Achilles' heel of retirement.
"Many Americans are just unprepared for normal living expenses in retirement," he said. "Therefore, it's no surprise they haven't given serious consideration to the potentially growing healthcare expenses they may encounter. The most significant healthcare expense bomb that's itching to detonate and blow away many retirement dreams is long-term healthcare."
As many as seven in 10 Americans are likely to require long-term care. A 2024 Cost of Care Survey by the insurance company Genworth reveals average costs at $6,483 per month for home health aides and $10,646 for a private nursing home room. Without long-term care insurance or a substantial nest egg, these costs can be ruinous for retirees.
Poor retirement readiness raises LTC risk
IRALOGIX also acknowledged that many Americans have saved too little in general, with survey respondents earning just 15.1 of a possible 35 points in the savings and investment category. Many do not understand how to create a sustainable retirement budget or withdrawal strategy, either.
These issues only exacerbate the crisis that being unprepared for healthcare spending could cause, as those with too little savings and no clear budget will have an even harder time covering their medical needs.
Retirees can, if necessary, cut many expenses in retirement, from downsizing to a less expensive house to moving to a lower cost-of-living area. But there's no escaping the fact that estimates suggest the typical 65-year-old retiree in 2024 would need $165,000 to cover out-of-pocket expenses not paid for by Medicare during retirement.
With healthcare costs rising faster than inflation, future retirees will need an even larger sum. As the IRALOGIX report shows, not having a plan for this is one of the key factors undermining retirement readiness.
How you can be more prepared for the future
Planning for healthcare simply isn't optional for future retirees. In fact, as you think ahead to retirement expenses, and especially before deciding it's time to retire, it's critical you make sure you can cover these costs.
"In planning for retirement, build a budget that covers what you believe to be all your fixed monthly expenses, including healthcare expenses," advised Domenick D'Andrea, a AIF®, CRC®, CPFA® and co-founder of DanDarah Wealth Management. Azoury agreed, stating, "Just like living expenses will need to be calculated, so do healthcare costs. As you age, costs will rise, so it’s important you factor that in as well."
To estimate your budget, be sure you understand what Medicare covers and excludes, as common care needs like dental costs, hearing aids, and long-term care aren't covered. You should also understand that traditional Medicare comes with 20% coinsurance costs for most outpatient care, so you'll need to look into the cost of Medigap plans that supplement traditional Medicare or Medicare Advantage Plans that replace it.
You should also consider your family's health history and your current health status when estimating what you'll likely need to spend. And don't forget about preparing for nursing home or home care. "A properly structured long-term care plan can help Americans pay for these unexpected care costs," according to Gillet. This could include buying long-term care insurance or making a Medicaid plan with an estate planning attorney.
Improving your overall retirement readiness can also be helpful. You can do this by identifying a safe withdrawal rate, creating a spending plan, and of course increasing the amount you save and invest.
"Americans who are over the age of 50 can use the catch-up provision and contribute an additional $7,500 into their 401(k)," D'Andrea said. "Secure 2.0 also allows a super catch-up contribution for people from age 60 to 63 to increase their contribution by $11,250 instead of $7,250." D'Andrea also said if you can't save more, working longer may be your only option if you aren't fully prepared for healthcare and other expenses.
Ultimately, the more you can invest for retirement, and the clearer you are on your budget, the better your chances of covering healthcare costs. If you aren't sure your money will stretch far enough, it simply may not be your time to retire.
Read More
-
Six Ways to Pay Off High-Interest Debt (and Still Save for the Future)Get out of debt and reach your goals sooner by starting with a well-thought-out plan.
-
Vaccines Medicare Covers for FreeThe U.S. is experiencing an outbreak of measles and is on track to have the most whooping cough cases since 1948; these vaccines Medicare covers for free can keep you safe.
-
Four Takeaways From Filing Your Taxes to Boost Your Financial FutureNow that another tax season is in the rearview mirror for most of us, what lessons can you take from what you learned about your finances to plan for the future?
-
First 100 Days: Trump's Impact on Your FinancesHere are some opportunities to consider regarding investing, interest rates and tax cuts as the financial landscape shifts under the new administration.
-
What Would Happen if You Put Your Tax Refund in an IRA?Not only could you get a tax break, but the compounding effect over 35 years could turn the average refund into nearly $14,000.
-
Most of the Money in IRAs Comes from a Surprising SourceAmericans don't typically stash money in IRAs from contributions. Here's how most people fund their IRAs, according to a new study.
-
A QLAC Does So Much More Than Simply Defer TaxesHere are the multiple ways you can use a QLAC, from managing retirement risks to creating income for specific retirement needs and wants.
-
Self-Directed Brokerage Accounts: Retirement's Hidden Gem?SDBAs are often overlooked, but they can offer more flexibility and growth potential inside your 401(k) when actively managed by a professional.
-
Tips to Help Entrepreneurs Create Self-Sustaining BusinessesWith the right processes and people in place, a truly sustainable business can be efficiently passed on to a successor and run profitably on its own.
-
Navigating Annuity Taxation: A Guide for Financial AdvisersUnderstanding the essentials of taxation in retirement income strategies involving annuities helps ensure positive outcomes for clients.
