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All Contents © 2019The Kiplinger Washington Editors
By Bob Niedt, Online Editor
| January 11, 2019
As 10,000 baby boomers turn 65 every day and count down the minutes to retirement, they’re also counting their savings – and their fears. They’re not alone. According to the latest Transamerica Retirement Survey, the single greatest retirement fear is outliving savings, which was cited by 52% of those polled. Indeed, 38% of workers aren’t confident they will be able to retire with a comfortable lifestyle, the survey found, and 46% don’t believe they are building a large enough retirement nest egg.
It’s time to face your fears. Before you start your retirement journey, learn more about the common reasons why some retirees wind up broke in their golden years. More importantly, learn what you can do now to avoid that fate.
Stacy Rapacon contributed to this story.
For those who survived (or are still recovering from) the Great Recession, it’s burned-in knowledge that stocks can be a risky investment. After a series of wild market swings in 2018, the benchmark Standard & Poor's 500-stock index ended the year in the red, down 6.2%. The tech-heavy Nasdaq Composite index actually fell into a bear market last year, defined as a drop of 20% or more from a recent peak. It’s scary to watch your nest egg shrink as you head into retirement, and the kneejerk reaction may be to pull all of your money out of stocks.
That would be wrong. Retirement experts say you’ll likely need at least some of your savings in stocks throughout retirement for diversification and growth potential. Consider this: Despite 2018’s woes, the S&P 500 gained an astounding 276.9% since the market bottomed out in March 2009.
“While there is no one-size-fits-all answer for what your stock allocation should be in retirement, for most people, stocks should account for anywhere from 40% to 60% of their portfolio in the years just prior to and after retirement, with the rest invested in bonds and cash,” says Carrie Schwab-Pomerantz, president of the Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty. “Where you fall on that range depends on your personal tolerance for risk, how much you expect to rely on your portfolio for income, and your anticipated longevity. But the important thing is to have some opportunity for growth that will outpace inflation.”
Wait a minute: Stocks are risky. "You don't want to have too much in stocks, especially if you're so reliant on that portfolio, because of the volatility of the market," says Schwab-Pomerantz. One route has nearing-retirement investors moving to 60% stocks as you approach retirement, and then trimming back to 40% stocks in early retirement and 20% later in retirement.
“Diversification is critical, too,” says Schwab-Pomerantz. “That means having a mix of small-cap, large-cap and international stocks, as well as a mix of industries and companies within those categories. While diversification doesn’t ensure a profit or eliminate the risk of investment losses, too much of any one stock carries a major risk of its own. Think mutual funds and exchange-traded funds for easy ways to get this diversification.”
Diversification also means investing beyond stocks. For steady sources of retirement income, look into U.S. Treasuries, municipal bonds, corporate bonds and real-estate investment trusts (REITs), to name a few options. Owning gold is another way to diversify your portfolio, as is owning real estate.
My parents are in their late 80s and in reasonably good health. They’ve far outlived their parents. With good planning and careful spending, they have enough money to live comfortably. For some boomers like me who are hand-wringing over retirement, that may not be the case; living a long life may actually be a financial liability.
“The good news is that people are living longer than ever before, so it’s widely recommended you plan for at least a 30-year retirement,” says Schwab-Pomerantz. More good news: Americans are starting to get down with that. Most workers polled by Transamerica said they expect to live to age 90, up from age 86 a year earlier.
But are they saving enough? The survey found that the average household had socked away $71,000 for retirement. That amount is up slightly from a year earlier, but alone it’s not enough to fund three decades of retirement. Social Security benefits will help, as will a pension if you have one. Downsizing your home and retiring in a cheaper state can help, too, as can locking in additional income for life from a deferred income annuity or qualified longevity annuity contract (QLAC).
We all do, before, and probably during, retirement. Employee Benefit Research Institute studies found that 46% of retired households spent more annually in the first two years of retirement than they did just before retiring.
“Ideally you’ve already started preparing a budget prior to entering retirement, but it’s critical to help you understand how to live within your means and not run out of money,” says Schwab-Pomerantz, who offers this simple retirement-budgeting strategy:
To get your expenses under control now, try Kiplinger's Household Budgeting Worksheet.
Roughly 3 out of 4 workers cite Social Security as the primary source of income in retirement, according to Transamerica. At the same time nearly half of American workers fear Social Security will be reduced or cease to exist by the time they retire. (It won’t.)
However, Social Security alone probably won’t be enough to see you comfortably through retirement. Having multiple income streams is the smartest play for retirees. Lean on a mix of a pension, if you’re among the fortunate few to have one; a 401(k) from your job; your own IRAs, either Roth or traditional; and the aforementioned annuities that can provide either lump sums of cash or steady payouts, depending on the type of annuity you choose.
The majority of boomers (53%) surveyed by Transamerica are planning to work beyond when they can begin collecting Social Security benefits (age 62) until when they have to take Social Security (age 70). And for 83% of workers surveyed, they’ll be working in retirement because of financial reasons. Most say they are staying healthy or sharpening their job skills to keep working in their retirement years.
But what if you can’t keep working? Health issues can strike at any time, and changes to your employment status resulting from downsizing, business failures or layoffs are always a risk. And anyone who has attempted to get a new job after age 50 knows ageism can be a very real obstacle. The Transamerica survey shows 58% of workers do not have a backup plan for retirement income if they are unable to work before their planned retirement.
What to do? Save aggressively, keep an emergency fund and review your insurance – in particular disability insurance – to ensure your coverage is adequate.
It’s no secret our health deteriorates as we get older. It’s also no secret health care is expensive. A report from the Employee Benefit Research Institute shows a 65-year-old man would need to save $72,000 to have a 50% chance of affording his health-care expenses in retirement (excluding long-term care) that aren't covered by Medicare or private insurance. To have a 90% chance, the same man would need to save $127,000. The news is worse for a 65-year-old woman, who would need to save $93,000 and $143,000, respectively. Be sure you're doing all you can to cut health-care costs in retirement by considering supplemental medigap and Medicare Advantage plans and reviewing your options annually.
Should you or a loved one need long-term care, costs skyrocket. According to Genworth Financial, the median cost for adult day health care in the U.S. is $1,560 a month; for a private room in a nursing home, it costs a median of $8,365 a month. Small wonder 73% of workers are concerned about their health in retirement, with 44% worried they’ll need long-term care due to declining health and 35% fearing cognitive decline, dementia and Alzheimer's disease. Premiums can be steep, but look into getting long-term-care insurance to help cover those costs.
OK, your younger self was smart enough to build multiple streams of money to tap in retirement. The older, retired you needs to know which accounts to tap when. It pays to come up with a withdrawal strategy that minimizes taxes and avoids penalties.
As a general rule of thumb, Schwab-Pomerantz recommends tapping taxable accounts first and allowing your savings in tax-deferred accounts such as IRAs and 401(k)s to continue to compound for as long as possible before being withdrawn and taxed. Just remember that traditional IRAs and 401(k)s funded with pre-tax dollars are subject to required minimum distributions starting at age 70 ½. Miss an RMD and you’ll face a stiff penalty.
Additionally, keep in mind that Roth IRAs aren’t subject to RMDs and there are no deferred taxes to contend with since Roth contributions are made on an after-tax basis. The flexibility of Roths comes in handy in retirement as you try to manage income levels from year to year and keep taxes at a minimum.
Your retirement savings drawdown strategy is in place, primarily based on federal tax rules. But have you considered how state and local taxes will hit your retirement nest egg? Depending on where you live, high state income taxes, state and local sales taxes or property taxes – or a combination of all three – could eat up your hard-earned savings quickly. Thirteen states even tax Social Security benefits.
It’s a big reason so many people pull up stakes and move to tax-friendly states for retirees such as Florida and Georgia. The nice weather is a draw, to be sure, but so too are incentives such as low or no state taxes on retirement income and generous tax breaks for older homeowners.
Do your research, consider friends and family in the equation and consult our handy State-by-State Guide to Taxes on Retirees.
It’s part of raising a family: You want to give your children a leg up by helping with college tuition or contributing to a down payment on their first home. But you can’t always be The First Bank of Mom & Dad. Your own financial security should be your priority.
“One of the most common financial mistakes parents make is funding their child’s education before taking care of their own retirement needs,” says Schwab-Pomerantz. “The point is that you won’t be of much use to your child or anyone else in the future if you can’t take care of yourself. So as long as you’re saving enough for your own retirement, then by all means help your kids with college. But if you’re paying for college at the expense of your own retirement savings, remember that there are many ways to cover the cost of college including financial aid, grants, student loans and scholarships. But there aren’t any scholarships for retirement.”
As for that new house, talk to your kids about their funding options. If they don’t have enough for a traditional 20% down payment on the home of their dreams, they might need to rent a cheaper place or (gasp!) move into your basement until they save enough. Or, they might need to scale back and target a less expensive starter home. Or, they might need to think unconventionally and find a roommate to share housing costs.
Cutting costs in retirement is important, but scrimping on insurance might not be the best place to do it. Adequate health coverage, in particular, is essential to prevent a devastating illness or injury from wiping out your nest egg.
Medicare Part A, which covers hospital services, is a good start. It’s free to most retirees starting at age 65. But you’ll need to pay extra for Medicare Part B (doctor visits and outpatient services) and Part D (prescription drugs). Even then, you’ll probably want a supplemental medigap policy to help cover deductibles, copayments and such. "Medicare is very complex, and it's more expensive than people realize," says Schwab-Pomerantz. "So it definitely needs to be part of the budgeting process."
And don't forget about other forms of insurance. As you age, your chances of having accidents both at home and on the road increase. In fact, according to the Insurance Institute for Highway Safety, the rate of fatal car accidents starts to skyrocket once drivers hit age 75. Beyond your own medical expenses, all it can take is a single adverse ruling in an accident-related lawsuit to drain your retirement savings. Review the liability coverage that you already have through your auto and home policies. If it’s not sufficient, either bump up the limits or invest in a separate umbrella liability policy that will kick in once your primary insurance maxes out.
Retirees are particularly vulnerable to scams. The FBI notes that older adults are prime targets for criminals because of their presumed wealth, relatively trusting nature and typical unwillingness to report these crimes. “People who grew up in the 1930s, 1940s, and 1950s were generally raised to be polite and trusting,” according to an FBI report. “Con artists exploit these traits, knowing that it is difficult or impossible for these individuals to say ‘no’ or just hang up the telephone.”
Even worse, the perpetrators may be closer than you think. According to a study from MetLife and the National Committee for the Prevention of Elder Abuse, an estimated one million seniors lose $2.6 billion a year due to financial abuse—and family members and caregivers are the perpetrators 55% of the time.
Common retirement scamsto watch out for often involve impostors pretending to be Social Security, Medicare or IRS officials. The absolute best way to deal with fraudsters who call you out of the blue demanding personal information or immediate payment? Hang up. “Medicare is not going to call you. Social Security is not going to call you,” says Kathy Stokes, a fraud expert at AARP. “The IRS will reach out to you many times by mail if you have back taxes as an issue before you would get a phone call.”
Many of us, in a mid-40s pinch, saw an easy way to pay down credit cards over five years by borrowing from our employer-sponsored retirement plans. After all, retirement was decades away and the money (our money) was just sitting there. Right?
But borrowing from your 401(k) is an all-too-common mistake you’ll regret in retirement. According to Transamerica, one-third of workers have taken some form of loan, early withdrawal or hardship withdrawal from a 401(k) or similar plan, with 35% of those surveyed doing so to pay off debt.
Taking a loan from your 401(k) can severely inhibit the growth of your retirement nest egg and have lasting consequences. Not only is the money you borrowed not earning interest in your account, but you’ve also stopped making new contributions as you try to pay down your debt. And, of course, no new contributions means no matching contributions from your employer. This is why every worker (and every retiree) needs an emergency fund…
Emergencies don’t end when retirement begins. A single home or auto repair – say, you need to replace your roof or get a new transmission – can strike a devastating blow to the budgets of fixed-income retirees who don’t have money set aside for just such calamities.
Unfortunately, quite a few baby boomers are members of the no-emergency-savings club. According to a Bankrate survey, 25% of boomers have no cash whatsoever put away to cover an emergency. Another 18% of boomers say their emergency savings would cover less than three months’ worth of living expenses.
Review your budget and reduce spending temporarily, so you can slowly build up your emergency fund. Six months’ worth of living expenses is generally recommended – just 36% of the boomers surveyed had hit that benchmark – but three-plus months should be adequate for many retirees. And keep insurance up to date to avoid taking a big hit from an auto accident, house fire or sudden illness.
According to the Consumer Bankruptcy Project, the number of older Americans who have declared bankruptcy has tripled since 1991. The project found 12.2% of 800,000 bankruptcy filings it analyzed were submitted from households headed by seniors. "For an increasing number of older Americans, their golden years are fraught with economic risks, the result of which is often bankruptcy," Consumer Bankruptcy Project’s report noted.
The reasons? The University of Idaho’s Deborah Thorne, the study’s lead author, told NPR at least two factors are contributing to the rise of retirement-age bankruptcies: medical expenses and falling income. “So it could be, you know, they lost money in 2008, or they've outlived their retirement 'cause they no longer get a defined benefit or a pension,” said Thorne. “So they've had a decline in income, or they've had medical expenses that they just absolutely cannot keep up with.”
Reliable income streams and adequate insurance are critical to retirees, but avoiding bankruptcy in retirement actually starts well before you retire. The key is reducing or eliminating your major debts – mortgage, credit card, student loan, auto loan and medical debt – before you stop working and switch over to a fixed income. If you need help developing strategies to tackle these debts, get a referral to a certified credit counselor from the National Foundation for Credit Counseling.