While the U.S. economy might be out of the Great Recession, Americans’ confidence in a secure retirement is still receding.
In a survey conducted by the Employee Benefit Research Institute, “worker confidence in having enough money to live comfortably throughout retirement declined slightly in 2013, resuming the slow downward trend that began in 2008,” the report highlighted how 28 percent of workers have no confidence at all, an increase from 23 percent in 2012.
In fact, confidence “is essentially unchanged from the record lows observed in 2011,” the institute revealed.
That’s right, record lows. Here’s the break-down:
• 13 percent of workers said they are very confident they’ll have enough money in retirement
• 38 percent are somewhat confident.
• 21 percent are not very confident.
• 28 percent are not confident at all.
Altogether that’s 51 percent confident and 49 percent not. Why so bleak an outlook? Because as EBRI puts it, “some workers may be waking up to a realization of just how much they may need to save”.
A full 45 percent of workers polled believe they need to be saving at least 20 percent of their salaries for retirement, while almost half of them believe they should be saving more than 30 percent. And the remaining 55 percent of those surveyed?
Most haven’t even taken the time to calculate what their future needs might be.
That’s where retirement readiness all begins, as Katherine Dean, national director of wealth planning at Wells Fargo Private Bank stresses, “There needs to be a better acknowledgement” of retirement expenses – including healthcare costs, and “to make an estimate as to what these costs will be and incorporate it into the plan.”
But don’t wait until you’re close to retirement before taking those steps. The sooner you begin, the more comfortable your retirement will be.
Here are just some of the costs future retirees should start planning for:
Social Insecurity
Known as “entitlements”, healthcare and social security programs have been under attack for years, and many
Americans are growing increasingly worried of reductions in benefits by the time they retire.
“Sixty-nine percent of workers are not too or not at all confident that Social Security will continue to provide benefits of at least equal value to the benefits retirees receive today,” the EBRI report showed. “In particular, the percentage not at all confident has risen from 34 percent [in 2012] to 41 percent in 2013.”
Regarding how heavily people expect to lean on social security, 44 percent of those surveyed believe it will be only a “minor” reliance, while 33 percent indicated they expect it to provide a “major” part of their income – awfully high for something that many question will even be around in a few decades’ time.
Have we considered how reliant we might be on social security when we retire? If we believe we will need to rely on it heavily, we should step up our efforts to reduce that reliance, since it might not be as reliable in the future as it is today.
Healthcare Costs
Another entitlement under attack is healthcare, often the single largest expense in retirement.
The average retired 65-year old couple can expect to pay $163,000 in out-of-pocket healthcare expenses plus the five to seven percent rate of inflation.
Don’t be fooled by the general inflation rate, currently at about 1.5 percent, which is just an average of consumer prices. Medicines and other medical costs rise by a higher inflation rate.
Are your investments growing by that much, or are they lagging?
Remember, too, that even when Medicare kicks in at age 65, you’ll still need to cover 40 percent of your medical costs out-of-pocket. And that’s without factoring in long-term care costs.
Bob Fragasso, CEO of Fragasso Financial Advisors in Pittsburgh, says there’s a 50 percent chance that any retiree is going to need long-term care.
“That can be $50,000 to $100,00 a year,” Dean tabulates, “with most people needing those services for two to five years.” On average, long-term care can add some $100,000 to $500,000 of additional medical expenses at some point during retirement for half of all seniors. Half!
For this reason, Fragasso encourages his clients to sign up for long-term care insurance.
Health Savings Accounts
If that puts some fright into you, consider it a good thing, as fear is usually what it takes to get people moving. It might even motivate them to open a Health Savings Account, which Natasha Rankin, executive director of Employers Council on Flexible Compensation, calls “one of the essentials that many consumers should be aware of”.
“They are portable,” Rankin informs, as the account stays with you as you move from job to job. Their balances roll over from year to year, “they are always paired with a qualifying high-deductible health plan”, and they cover health care costs as well as long-term care.
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A Healthy Budget
Of course, what’s the use of having an HSA, 401K, or other investment plan if we don’t have any money to put into them? As EBRI reports, “Cost of living and day-to-day expenses head the list of reasons why workers do not contribute (or contribute more) to their employer’s plan, with 41 percent of eligible workers citing this factor.”
To better prepare for our living expenses tomorrow, we need to keep an eye on our living expenses today, with high levels of debt requiring immediate attention.
“55 percent of workers and 39 percent of retirees report having a problem with their level of debt,” the report found, “and only half (50 percent of workers and 52 percent of retirees) say they could definitely come up with $2,000 if an unexpected need arose within the next month”.
Naturally, some types of debt are necessary, even beneficial. Purchasing a home or apartment can be a great way to build up equity and stop tossing rent money out the window.
But for almost all other expenses, if you can’t afford to pay for an item in cash, you probably can’t afford the item at all; at least not right now. If the item ends up sitting on your credit card for an entire year, you will have paid some 20 percent more than it would have cost you if you had paid in cash.
Banks have enough money. Keep the interest for yourself. You’ll be needing it in the future. The interest you pay your credit card company could be helping you instead of them if you stash it in your retirement account and shop with cash as often as you can.
Seek Professional Advice
Everyone understands we should consult a doctor when seeking medical health advice. But few acknowledge the importance of consulting a financial advisor for some healthy investment advice.
“Just 23 percent of workers (and 28 percent of retirees) report they have obtained investment advice from a professional financial advisor,” the EBRI survey revealed. “Of these workers, 27 percent followed all of the advice, but more [68 percent] disregarded some” or even most of it.
Well at least they consulted; that’s an important first step. With plenty of information available on tv and the web, there is really no excuse for financial illiteracy. And considering the costs of retirement as noted above, there is really no tolerance for it either. We owe it to ourselves to seek professional retirement planning advise, and perhaps even hiring some services.
Preventative Care
There is one more thing we can do to reduce retirement costs and better care for our health in the future… we can take better care of our health today.
As always, the most obvious concern is smoking. It is one of the few products we put in our mouths that our bodies have absolutely no use for. They contribute nothing, while costing us our health and our money – both today and in the future. Not only can quitting save you as much as $300 per month on tobacco products, it can also save you a few hundred dollars a month on insurance premiums – not to mention hundreds of thousands of dollars in future healthcare costs.
The same goes for excessive alcohol consumption. Cutting back will save you a little money now, and a lot of money later. A new liver is not only expensive, but can be hard to find in the first place.
Finally, we mustn’t under-appreciate the importance of a proper diet and exercise.
Although this is one area where we might have to increase our present spending to cover the higher costs for non-factory foods and gym memberships, it pays off in the long run when considering the high cost of treating diabetes, heart disease, and other complications associated with obesity.
You can think of this as a fixed asset investment.
Has Your Confidence Retired Before You Have?
Despite improving economic reports fired at us from the tops of ivory towers on a weekly basis, at the ground level Americans are still uncertain about their futures.
Don’t let your confidence in your retirement retire before you do. Make an honest assessment of your future needs and consult with professional planners to help you draw up a plan to enjoy your retirement.
Increasing costs coupled with decreasing government assistance mean we must take a more active role in supporting ourselves.
If we start now with the basics of decreasing our expenses and increasing our investments, we can make sure our retirement needs are not only met but even surpassed.
Joseph Cafariello
