How to Stay Financially Confident in Retirement
In todays’ age, retirees are living longer and experiencing retirement in new ways. In general, people no longer work for the same employer for 50 years, retire on a predictable pension, and settle into a quiet lifestyle.
Instead, today’s retirees are more active—with baby boomers controlling 70% of the country’s disposable income. They’re traveling the world, learning new skills, and redefining how to stay confident in retirement. According to the National Council on Aging, 10,000 boomers are retiring daily. At this rate, the drive to enjoy life and have a vibrant retirement will likely only become more common.1,2
This week, Guest blogger Nichole Coyle, CFP, discusses how to assess your needs, look ahead, and prepare for both the known and unknown. While you can’t be sure what the future holds, you can strategize for the retirement life you want—and take these five steps to help you get there with confidence.
Step One: Calculate your actual costs:
According to a 2019 Employee Benefits Research Institute (EBRI) survey, only 42% of pre-retirees calculate a budget for retirement. Yet, knowing how much money you need to cover your cost of living is critical when forming a strategy to be confident in retirement. If you don’t identify your actual retirement costs, you risk leaving yourself without the necessary income to cover your expenses.
Understanding how much you’ll need allows you to determine if you’ll need to adjust your lifestyle. To become more confident with your cost of retirement, identify as many of the expenses you can safely anticipate incurring. Here are some questions to ask as you create your budget:
How much are my living costs?
On average, households run by people who are 65 years and older spend about $3,800 each month. To identify your costs, list every dollar you spend to support your daily living needs, from transportation to food. Pay particular attention to any expenses that you might be able to eliminate from your budget.
What are my health care costs?
Health care expenses are the second-highest financial priority among retirees. A retired couple should prepare to spend $285,000 or more to cover expenses during their retirement years. A single man should prepare for approximately $135,000, and a single woman, for roughly $150,000.3
One option to help retirees prepare for health care is investing in a Health Savings Account (HSA). An HSA isn’t insurance, but it does provide a tax-advantaged savings account that you, and potentially your employer, can make contributions over time. You can use these funds to pay for most medical expenses, including prescription drugs, dental care, and vision care.
Keep in mind if you spend your HSA funds on nonmedical expenses before age 65, it may be necessary to pay ordinary income tax as well as a 20% penalty. After age 65, you can take money out without the 20% penalty, but it may become taxable income. HSA contributions are exempt from federal income tax, but they are not state taxes in certain states.
What income will I have?
Income can come from a variety of sources, such as retirement accounts, pensions, part time work, Social Security, and other sources. In its 2019 survey EBRI found that retired couples can expect to spend 86% of their pre-retirement income each year of retirement.
Step Two: Be Aware of Your Debt
Today’s retirees are much more likely to have debt than any generation before them. The EBRI reports for those who are 75 years and older, debt has increased by almost 60% since 2007. The average debt for families led by someone 55 years and older is $76,679. Debt can play a role in any financial strategy, but it’s critical to understand its benefits and limitations, especially if you want to feel financially confident in retirement.
Step Three: Create Income Stability
Start your retirement strategy by calculating your actual costs and creating a working budget. Put together a list of your income streams as well as where you are directing those funds. Without a clear picture of your income and expenses, you might lose sight of your budget and find it challenging to maintain your lifestyle.
The TransAmerica Center for Retirement Studies reports Social Security benefits were the primary income source for 66% of retirees in 2019. The average monthly payout was $1,461. When strategizing income stability, you should consider having diverse sources of income, designed to last the rest of your life. It’s best to work with a trusted financial professional to help you identify income needs. Only 27% of retirees take this potentially helpful step.10 The amount of income needed varies from person to person, as lifestyle choices, health care expenses and other personal expenses all play a part in a budget.
Step Four: Build Your Savings
In a survey by Alliance for Lifetime Income, most Americans feel anxious that their savings won’t last through retirement. So, while we’re generally feeling more confident about retirement, money issues are still a worry.
The average retiree should be prepared to spend $738,400 in total costs for retirement, according to Marketwatch.5 For many, that’s a staggering amount of money. Much of these costs could be covered by your Social Security payments. The balance will likely need to be paid for by a combination of retirement accounts and private savings.
The once common pension is disappearing in the U.S. Since 1995, nearly 10 million people have lost access to pensions. In its place, many employers now offer other forms of retirement plans.5 Many of these new plans place a larger amount of savings responsibility onto the employee. As a result, it’s no surprise that those who have employer-sponsored plans have the highest levels of retirement confidence. In cases where they also have a spouse with such a plan, confidence in their retirement increases.13
Step Five: Continue Working
Continuing to work has become an increasingly common part of financial retirement strategy. No matter what you are planning, here are some benefits that working can bring your retirement:
- Supplement your income. Whether for extra spending money or to cover daily expenses, it may also fill gaps left from other income sources. Your financial goals may help guide the amount of income you’ll need from either part- or full-time work.
- Explore new passions. Retirement can be an opportunity to tap into your passions. When you feed these interests, you may also encourage ongoing personal growth in your later years, further supporting your health.
- Stay social. Maintaining a social network in retirement may help people stay positive and healthy. In fact, 37% of retirees miss the social interaction they experienced when working. The TransAmerica Center for Retirement Studies notes that staying active at work may help you beat these blues.
Creating a strategy to stay confident in retirement is essential. Only you know what a fulfilling retirement means for you. So, now is a perfect time to take steps toward the life you envision. By calculating your costs, getting ahead of your savings, and working with a professional, you can set yourself up to retire confidently.
Remember, if you have any financial questions, I’m happy to help you navigate a complicated retirement landscape. I can also collaborate with your legal and tax professionals. I believe that retiring is an opportunity to realize your best life, and I’m here to help you make that vision a reality.
Nichole M. Coyle,
CERTIFIED FINANCIAL PLANNER™
20333 Emerald Pkwy
Cleveland, OH 44135
Securities and advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a Broker-Dealer, and a Registered Investment Advisor. Cetera is not affiliated with the financial institution where investment services are offered or any other named entity. Investments are: Not FDIC/NCUSIF insured * May lose value * Not financial institution guaranteed * Not a deposit * Not insured by a federal government agency.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice. Information is provided by Nichole Coyle and written by American Funds Distributors, a non-affiliate of Cetera Advisor Networks LLC. All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies. American Funds Distributors, Inc., member FINRA.
1MediaPost.com, 2019 2National Council on Aging, 2015 3Barron’s, 2019 4MarketWatch.com, 2018 5 CNN.com, 2019
Posted In: Guest Blog, Tips For Managing Finances