For some, retirement is right around the corner and for others, it seems so far away that it’s just a dream. Regardless of what stage in life you are in, there is a chance that you have thought about retirement and the fears that come with it. Today, I want to dig deeper into those fears and suggest some ways to conquer them.
1. Outliving your money
According to the Centers for Disease Control and Prevention, the average life expectancy in the United States is 78.6 years. Just imagine for a second if you lived to be age 85 or even 95. Could your retirement savings last that long? In many surveys, the biggest fear for individuals is that they will run out of money in retirement. Does this sound like you?
2. Rising cost of health care
Unfortunately, for many, with age comes health issues. The cost to treat these issues continues to rise. Many people fear that even with adequate retirement savings, a major health event could cripple their finances and eliminate their savings. According to a recent study done by Fidelity, the average couple will need around $285,000 in today’s dollars to cover medical expenses in retirement.
3. Losing all your money in a stock market crash
You have saved your entire life, and then out of nowhere, the stock market plummets. We saw this in 2008 and it caused a lot of fear and anxiety. It seemed like your friends, family, neighbors and acquaintances were all affected by the crash. Whether you were already in retirement or 50 years away, you started feeling fear of putting your money in the market.
4. Inflation
You remember hearing the stories from the older generations telling you about the “good ol’ days” when a gallon of milk was fifty cents and a tank of gas was a couple of dollars. Inflation measures how prices increase and your purchasing power decreases over time. This is a fear in retirement because when someone retires, the cost of a good or service will be much higher 20 years into retirement.
5. The uncertain future of Social Security
According to Social Security, in 2017 more than 67 million people received benefits. This number is expected to rise, especially with baby boomers now beginning to retire. Social Security has been a staple for numerous retirees so far, but sustaining the program has been on the minds of many financial experts, with so many retirees getting ready to file for benefits and not enough workers to replace them.
How to Conquer Retirement Fears
We’ve listed some of the most common types of retirement fears and you may even have others not listed. Regardless of what fear you have, finding ways to cope with these uncertainties is something that is on the hearts and minds of all those who either want to retire someday or are already in retirement. Here are several ways to conquer retirement fears:
1. Set realistic goals
Probably one of the most important steps is not only beginning to set goals for retirement, but setting realistic goals. If you are only 5 years from retirement, but want to have a million dollars saved and you currently have not begun saving, there is a good chance you will not reach this goal. However, if you are in your early twenties and want a million dollars saved by the time you are 60, this is much more realistic and attainable. You have to take a look at your current financial situation, and begin to set reasonable goals. Start with small goals and work your way up to larger ones.
2. Calculate how much you will actually need to retire
Along with setting realistic goals, you will need to calculate how much you will need in order to retire. Many experts believe that you should aim to replace around 70% of your yearly pre-retirement income. You can start with getting estimates from guaranteed sources like Social Security, pensions, annuities and other related income. After you calculate your guaranteed income, you can then begin to estimate what you will need to withdraw from your savings, 401(k), 403(b), IRAs, account interest and other retirement accounts every month. Knowing this figure will help you to determine how much you will need accumulated by retirement.
3. Maximize your 401(k) or 403(b)
What is a 401(k) or 403(b)? A 401(k) is an employer-sponsored retirement plan that allows employees to invest pre-tax and sometimes post-tax money into their own personal accounts. A 403(b) is pretty much the same as a 401(k) but one of the main differences is that it is utilized by non-profit organizations, religious groups and school systems.
One of the best strategies in maximizing your 401(k) or 403(b) is to take full advantage of an employer match, if one is offered. Think of an employer match as getting free money just for contributing your own money. Each company is unique in their matching opportunities but here are 2 examples of how a match could work:
- Dollar for dollar match up to 3%. In this scenario, a company would match the employee $1 for every $1 that employee contributes, up to 3% of their gross pay. For example, if the employee earned $50,000 gross annually and contributed 3%, it would equal out to $1,500. The employer would also contribute 3%, which equals $1,500. So a total of $3,000 is contributed to the account between what the employer and employee contributes.
- 50% match up to 3%. In this scenario, a company would match the employee 50 cents for every $1 that the employee contributes, up to 3% of their gross pay. For example, the employee earned $50,000 gross annually and contributed 3%, which equals $1,500. The employer matches 50 cents on a dollar, which equals out to 1.5%, and around $750. So a total of $2,250 is contributed to the account between what the employer and employee contributes.
4. Open an Individual Retirement Account (IRA)
For those who have maxed out their 401(k), 403(b) or are self-employed, an IRA is definitely worth considering. There are even times where an employee may not get a match to their 401(k) and an IRA may have better options. Everybody’s situation is different. There are many types of IRAs, but the 2 most common are a Traditional or a Roth IRA.
- Traditional IRA. With a traditional IRA, the contributions are made with pre-tax money and are tax deductible in the year that they are contributed. You pay taxes once you withdraw the money.
- Roth IRA. With a Roth IRA, the contributions are made with post-tax money and are not tax deductible. Because the contributions were already taxed, distributions are not taxed.
5. Monitor your progress and adjust if necessary
Once you have set goals and are beginning to save for retirement, you will need to continue to monitor your progress. This can be done once every year or two. The purpose of this is to determine where you are and if you are still on track to reaching your goals. If you see that you are not on track, at that point, you will still have time to adjust your finances in order to reach your goal in retirement.
6. Don’t touch your retirement savings
There will be times where you might be tempted to withdraw some of your retirement savings. This should be avoided at all costs because not only will you be hit with a 10% penalty for early withdrawal, but if you are under 59 ½, you will also pay taxes on what you withdraw. These are just the immediate implications of withdrawing money early. You will also potentially miss out on compounding your earnings over the long run so this could end up costing you a substantial amount in retirement or what you would have had in your retirement as a nest egg.
7. Begin to research health care options
Just like you are planning to save for retirement, you must start thinking about healthcare costs and options in retirement. Does your employer offer you health insurance once you retire? If you retire before you are eligible for Medicare at age 65, do you have an idea of what insurance you or your spouse are eligible for? These are just a few questions you can start answering for yourself. Health care is one of the most expensive costs for seniors, but preparing now could benefit you for years to come.
Summary
Retirement fear is something that many people experience at least once in their lifetime. Taking the necessary steps to face this fear is difficult, but ultimately will be beneficial in your path to financial success and retirement. The earlier you prepare for retirement, the better off you will typically be. However, even if you have not prepared adequately in your lifetime, you can still achieve success in retirement if you are willing to sacrifice and begin preparing today.