Are you anxious about transitioning into retirement? You’re not alone. A recent study shows that 65 percent of pre-retirees worry if they’re saving enough for retirement right now, and 52 percent feel overwhelmed about how they’ll manage all their income streams once they transition.
PAX Financial Group has helped countless pre-retirees prepare for retirement. In that experience, we’ve come to realize that there are common worries everyone seems to have as they pivot into life’s next chapter (regardless of how much money they have). The goal is to share those worries with you and shed some light on how you can address these concerns.
Here are 4 things pre-retirees worry about most.
1. Healthcare Costs
Healthcare will likely be your largest expense in retirement, so it makes sense that it’s on your mind. Reports estimate that the average, healthy couple age 65 today will need close to $390,000 to cover health care expenses in retirement.
There are 3 reasons why these costs are so high:
1. People are living longer. When Social Security began in 1935, the average life expectancy was only 60. While living longer is a good thing, you’ll need more money to cover the health-related costs you’ll incur over a 20- to 30-year retirement.
2. Healthcare inflation typically outpaces general inflation. Since 1938, the healthcare inflation rate has been around 5.28 percent a year. This is nearly 3 times as high as the general rate of inflation, which typically hovers around 2 percent.
3. The average retirement age is 62, but you’re not eligible for Medicare until age 65. This creates a three-year period where retirees have to get COBRA continuation, hop on a spouse’s plan or secure public or private health insurance on their own dime.
Even after Medicare kicks in, it won’t cover everything. This is a common misconception. Click here to read our recent blog post for other frequently asked questions about how Medicare works.
How To Address This Concern
A smart way to plan for rising healthcare costs is to meet with a retirement planning group that can help you sort through your options. If you’re still working, there are a few things you can do now to plan ahead.
If you have a high deductible healthcare plan, you may want to consider maxing out contributions to your HSA. For 2020, individuals aged 55 and older can contribute up to $4,550 for single plans and $8,100 for family plans. This money is 100 percent tax-free and can go a long way in stretching your retirement dollars.
Another option is to postpone retirement until age 65, so you have an employer-sponsored plan to help cover expenses until Medicare kicks in. This may also allow you to delay Social Security, which will increase your monthly payout when you start claiming benefits.
If you’re set on retiring before age 65, you may want to pick up a part-time job that offers health insurance. You’ll be able to get a jump start on retirement without having to foot the bill for public or private insurance.
2. Outliving Your Retirement Income
A NAPA study reveals that 72 percent of pre-retirees worry they’ll run out of money in retirement. In fact, it’s the #1 reported fear among pre-retirees.
But here’s another shocking statistic: Only 48 percent of Americans have attempted to calculate how much money they’ll need in retirement. It’s easy to panic when you don’t know how much you should be saving.
How To Address This Concern
The key to calming your fears and making your money last in retirement is to develop a comprehensive retirement plan. We recommend establishing a plan with a trusted retirement planning group that can, among other things, help you:
- Estimate exactly how much money you need to support your ideal lifestyle in retirement
- Create a sustainable withdrawal strategy that helps ensure you have a paycheck for life
- Maximize and optimize your Social Security benefits
- Ensure your family is well taken care of should something happen to you
3. Taxes
How much do you know about minimizing taxes in retirement? If you’re like 70 percent of pre-retirees who are five years from retirement, the answer is “nothing” or “not a lot.” However, there are a lot of factors that go into minimizing your tax bill.
How To Address This Concern
There are many different strategies that can help you cut your tax bill in retirement. Here are just a few:
- Take advantage of a Roth IRA conversion
- Donate your Required Minimum Distribution (RMD) to charity
- Harvest your losses to offset taxes on 401(k) distributions
- Defer Social Security until closer to age 70
- Keep your capital gains taxes low
- Use every tax credit and deduction you qualify for
There are a lot of factors to consider when minimizing your tax bill. A retirement planning group can help you figure out which strategies work for your situation.
4. Market Swings
The Coronavirus sent stock markets plummeting earlier this year. After decades of saving, the last thing you want to do is sit by helplessly as your portfolio dips right as you’re about to start pulling from it. But take a deep breath. There are strategies you can use to protect your nest egg.
How To Address This Concern
Market swings are bound to happen. One way to plan for them is by building up a cash reserve. At the same time, carrying too much cash can be dangerous because your money won’t keep up with inflation. It’s important to find a happy balance.
Here’s one strategy you can use to shield your nest egg from market swings, but still put it in a position to grow for 20-plus years.
1. Estimate how much monthly income you’ll need in retirement.
2. Calculate your guaranteed income (including Social Security, annuities and pension payments).
3. Identify the gap between what you’ll need in retirement and what you’re guaranteed in Step 2.
4. Save up enough money to cover two to three years of “gap” expenses. Store it in a high-yield savings account where you’ll earn a modest interest rate.
For example, let’s say you need $5,000 a month in retirement. Your guaranteed income from Social Security and other sources equals $3,500. You’ll need to pull $1,500 a month from your retirement accounts to cover the difference.
In this scenario, you’d keep anywhere from $36,000 ($1,500 x 24 months) to $54,000 ($1,500 x 36 months) in a high-yield savings account. If the stock market takes a hit, you can use this money until your portfolio recovered.
Again, this is just one strategy. Discuss all of your options with a retirement planning group before choosing a route to take.
How PAX Financial Group Can Help
Retirement should be about living life to the fullest and getting to do all the things you never got to do during your working years. Put your worries at ease by creating a plan that addresses your concerns.
At PAX Financial Group, we specialize in helping pre-retirees pivot into retirement with confidence. If you’d like help planning for life’s next chapter, we’d love to offer our expertise and guidance. To get started, contact us and schedule a meeting that works for you.
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.
