When you're planning for retirement, you don't exactly have a crystal ball that will accurately predict your future. Therefore, it can be practically impossible to foresee all of the possible scenarios which could occur once you stop working. But it may be possible to safeguard your retirement to a reasonable degree, by preparing for some of the most common retirement problems.
A recent Fidelity study uncovered a potential pitfall for retirees: The average couple retiring this year will face $220,000 in out-of-pocket heath care expenses during their retirement. Since that's not small change for the overwhelming majority of Americans, it represents a serious expense that we need to take seriously.
Why is the estimate so high? There are two reasons. For one thing, people are living longer these days, due to better nutrition, health care, and preventive medicine. And of course, we've seen a sharp increase in the cost of health care in recent years. The end result may be that you could spend more on health care each year, and you may have more years to rack up medical bills.
Medicaid eligibility begins at age 65, but due to limited coverage you may need to purchase supplemental insurance. If you had planned to retire at age 62, you need to make sure your health care expenses will be covered for the next three years. Otherwise, you could end up needing to take more money than you had planned from your retirement account, and your retirement income will be impacted for the rest of your life.
One way to address the problem of health care costs in retirement may be to simply not retire when you had planned. At the moment, leaving your job may also mean abandoning your health care plan. Even if your company does offer retiree health care benefits, the premiums and co-pays may be surprisingly expensive. By working three more years until age 65, you maintain your current health insurance coverage, and you also have three more years to pay down debts and save for a more comfortable retirement.
Social Security recently announced that the Cost of Living Adjustment (COLA) for 2015 would equal 1.7 percent of current scheduled benefits. In other words, your Social Security check should increase by 1.7 percent, beginning with January's payment.
For the average retiree, a 1.7 percent increase amounts to about 22 dollars for single people, and 36 dollars for couples drawing benefits. Naturally, your increase may be slightly more or less than those amounts, depending upon the exact amount of your current monthly benefit checks.
Some retirees will be happy to have a little extra cash in their monthly budgets, but many others may feel disappointed in this year's COLA. After all, this will be the third year in a row that the increase has amounted to less than 2 percent. That's because inflation, as reported by the Consumer Price Index (CPI), has remained at historically low levels in recent years.
COLA is tied to the CPI, which measures the prices of common goods and services. But many seniors feel that the CPI doesn't accurately represent their unique spending habits. Since CPI measures spending by urban workers, who tend to be younger than the average retiree, the index may not give accurate weight to the price of things that affect the retirement population. Despite the inflation rate remaining low overall, prices of certain necessities like food and prescription medications have increased.
Do you feel this year's COLA is an accurate representation of your budgetary needs? If you're disappointed, remember that Social Security should comprise only part of your retirement income. Talk to your financial advisor about other ways to find more room in your budget, so that you can continue to enjoy your current retirement lifestyle.
When you picture your retirement, you probably aren't dreaming about mountains of bills and phone calls from debt collectors. Yet, if you fall into any of these common debt traps, you could seriously hamper your ability to retire free of debt. Avoid making the following mistakes, and you'll thank yourself later.
Credit card blunders. Credit cards are one of the most significant forms of debt in most American households. High interest rates and large fees can cause debt to spiral out of control, making it difficult to pay off your balance. If you're burdened with heavy credit card debt now, make an appointment with a credit counselor and formulate a plan to pay down your debt. If you aren't already in deep water, consider yourself lucky. Prevent future problems by refusing to make impulse purchases with a credit card, and pay off any emergency charges as quickly as possible.
Mortgage mistakes. Many Americans feel tempted to buy a more expensive home than they can really afford. Remember that you're more familiar with your finances than a loan officer, and don't take on debt that makes you feel uncomfortable. Aim to spend no more than 28 percent of your monthly budget on you house payment, including homeowner's insurance, private mortgage insurance, and property taxes.
Second mortgages are often a big mistake. If you're tempted to take out a second mortgage to pay for home renovations, make sure the value of your house increases enough to cover the cost of the loan plus interest.
Risky 401(k) moves. When you need cash for a child's college tuition or an emergency, you may feel tempted to borrow from your 401(k). But this can be a risky move with harsh long-term consequences to your finances. Even if you eventually pay yourself back, you've lost the interest that may have accumulated over months or years. It may be easy to ignore the consequences now, but you might regret this decision once you retire.
One of the main reasons we plan so carefully for retirement is that we can't wait to get there. But before you get carried away and get in a hurry to retire, stop and think carefully about whether you've really saved enough money to quit working. In today's competitive workplace, it could be difficult to go back to work if you find yourself needing more income after retirement.
One way to provide a more comfortable retirement, and prevent financial difficulties after you stop working, may be to postpone retirement by five more years. That idea may not appeal to you at first, but consider the effects five more years of savings could have upon your retirement income.
1. After you turn 50, you can make additional catch up contributions to your IRA, 401(k), or other retirement plan. Beginning in 2015, you can contribute an addition $6,000 to your retirement account each year. In five years you'll have saved an extra $30,000, plus interest, more for retirement. Remember, that's in addition to your regular tax-deferred contributions, which can reach $18,000 per year beginning in 2015.
2. With years of experience under your belt, you're probably at the peak of your career now. This is a great time to pay down your debts, so that you can enter retirement free of high-interest credit card bills.
3. Over the course of five years, the funds in your retirement account could accumulate considerable interest. As your capital grows, this will further boost your eventual retirement income.
4. No one likes to think about the end of their retirement years, but it's something we can't avoid. When you work for five more years, you also shorten your retirement by five years. You'll be less likely to outlive your money and run into needing additional income at the end of your life.
Delaying retirement may not be the right plan for everyone. But when you consider the positive impact it could have upon your retirement savings, it's easy to see why some people decide to work just a few more years.
Carstens Financial Group focuses on providing comprehensive asset management, estate planning and life insurance solutions. Allow us to help you secure your financial future.