The realities you face when you stop working might be a far cry from your retirement dream. Of course, retiring broke or not being able to retire at all are among the worst-case scenarios.
But there are plenty of other snags you might encounter. If you haven’t properly prepared for leaving the working world and living without a paycheck, you’ll have to face the ugly truths about retirement. Find out more about these 14 downsides of retiring that no one talks about, along with solutions to avoid each potential problem.
Your Net Worth Becomes Meaningless When You Retire
You might have diligently been setting aside money for the future and have a big nest egg now. But even $1 million might not last long in retirement if you live in a state where the cost of living is high.
Unfortunately, when people set retirement savings goals, they often do so without actually knowing how much they’ll need each month to cover expenses in retirement, said Niles Geary, co-founder and CEO of Voyage Partners, a financial planning firm in Johnson City, Tennessee. Only 38% of workers have estimated how much income they would need each month in retirement, according to a survey by the Employee Benefit Research Institute and Greenwald & Associates. “Your net worth becomes meaningless when you retire,” Geary said. “The only thing that matters is how much income your net worth produces.”
Solution: Create an Income Plan
For starters, don’t assume that you’ll spend a lot less in retirement. Most retirees spend between 80% and 90% of what they were spending during the year before they retired, Geary said. So your savings need to be able to generate enough monthly income to sustain your current spending habits.
If you’re already retired and didn’t calculate how much income you would need to cover monthly expenses, you might have to make adjustments in your spending. Geary recommends distinguishing your needs from your wants and calculating how much you need to get by each month versus what you’re also spending on wants.“That gap has gotten pretty big,” he said. Eliminating many of your wants might help you make your retirement savings last longer.
Taxes Can Take a Big Bite Out of Retirement Income
Another big problem retirees face is a larger-than-expected tax bill on their retirement income. “Everyone thinks their tax rate will go down when they’re retired,” Geary said. “That’s a misconception.”
If you’ve saved most of your money in a tax-deferred retirement account such as a 401(k), you will have to pay taxes on your withdrawals at your regular income-tax rate. So if you need, say, $50,000 a year to cover expenses, you’ll have to withdraw even more than that to cover taxes.
Solution: Create Tax-Free Sources of Income
You need to have savings that you can access tax-free to reduce your tax bill and keep more of your money. You can do this by saving in a Roth IRA or Roth 401(k) because you can withdraw money from accounts tax-free in retirement. “Ask your employer if you have a Roth option,” Geary said. “Most of the time, the answer is yes.” If not, ask your employer to add a Roth 401(k) to your account options.
Funding a permanent life insurance policy also can provide a source of tax-free income in retirement because you can borrow from the cash value of your policy. Talking to a financial planner can help you decide if this is a good retirement savings strategy for you.
Inflation Can Impact Your Retirement Income Needs
As you calculate your retirement income needs, you’ll need to take inflation into account.
“It’s important to understand that the effects can be stealth. Inflation affects our purchasing power,” said Marguerita Cheng, CEO of Blue Ocean Global Wealth, a financial planning firm in Gaithersburg, Maryland. If you want to maintain your current standard of living in retirement, count on spending more over the years as the cost of living rises.
Solution: Invest In Equities
Over the past several years the annual inflation rate in the U.S. has hovered around 2%, according to the Bureau of Labor Statistics. If you don’t want your purchasing power to be eroded by inflation, invest in assets with a higher rate of return to avoid running out of money in retirement.
“The solution is to include equities in your investment mix,” Cheng said. Because you will need your savings to continue to grow while in retirement, you should keep stocks or stock mutual funds in your portfolio even after you retire.
You Might Outlive Your Savings
When asked, most people would likely say they want to live a long, healthy life. But this can be a downside to retirement for those without adequate savings.
The average life expectancy in the U.S. is 78.6 years, according to the Centers for Disease Control and Prevention. However, about 1 in 4 65-year-olds today will live past age 90, according to the Social Security Administration. That means some people could spend decades in retirement.
Solution: Plan For a Long Retirement
It’s impossible to predict the future. But the Social Security Administration does have a life expectancy calculator that will show you the average number of years you can expect to live based on your gender and date of birth. You can use this figure as a starting point when calculating how long your retirement savings need to last.
To be safe, though, your plan needs to provide you with enough income to meet your needs for potentially 30-plus years, Geary said. If you’re not on track to have enough savings, you might need to delay retirement.
Long-Term Care Costs Could Wipe Out Your Savings
Even if your nest egg is large enough that you won’t outlive your savings, you still could run out of money if you don’t have a plan to cover long-term care costs, Geary said. If you reach age 65, there’s about a 50-50 chance you will need some sort of long-term care, according to the U.S. Department of Health and Human Services. This sort of care isn’t cheap.
The median annual cost of an assisted living facility is $48,612, and the median annual cost of a private nursing home room is $102,200, according to the Genworth Cost of Care Survey. “You could easily burn through $1 million taking care of one person,” Geary said.
Solution: Get Long-Term Care Coverage
Don’t expect to cover long-term care costs with health insurance or Medicare. These provide only limited coverage for specific types of long-term care, according to the Administration on Community Living. And you likely won’t have enough money to self-fund your care, Geary said.
That’s why you should consider a long-term care insurance policy. If you don’t like the idea of paying for insurance you may never use, you could get a life insurance policy that provides a long-term-care benefit. You can save money on premiums and reduce your risk of being denied coverage if you apply for a policy before age 50, Geary said.
You Might Not Be Prepared For High Healthcare Costs
If you aren’t prepared to cover healthcare costs in retirement, you could be in for a shock. Fidelity Investments estimates that a 65-year-old couple that retired in 2019 would need $285,000 to cover medical expenses in retirement. That doesn’t even include long-term care costs.
If you haven’t factored healthcare costs into your retirement savings and spending calculations, you might have trouble paying for medical care in retirement.
Solution: Reduce Costs and Build Health Savings
There are several steps to deal with rising healthcare costs in retirement. You might benefit from working longer to continue receiving subsidized health insurance from your employer. Also, you can contribute to health savings account while you work if you have a high-deductible health plan. You can withdraw HSA funds in retirement tax-free for qualified medical expenses.
Opt to have any significant medical procedures you know you will need while still employed to optimize the use of your health coverage, said Laurie Kane Burkhardt, a certified financial planner with Modera Wealth Management in Boston. “Consult with health insurance experts to evaluate your choices for post-retirement insurance coverage and ensure that you select the best coverage for you,” she said.
Living On Social Security Alone Will Be Challenging
The average monthly Social Security retirement benefit in 2021 will be $1,543, according to the latest figures from the Social Security Administration. That’s only $18,516 a year. “If Social Security is all you have, you will find out very quickly you do not have enough money to meet your needs,” Geary said.
He said there are people in Johnson City, Tennessee, where he lives, who are trying to get by on Social Security alone and have to make a decision each month whether to buy their medication or food. “It’s a very scary and sad place to be,” he said.
Solution: Maximize Social Security Benefits
Of course, if you want to avoid retiring on Social Security alone, you’ll have to build savings while you’re working. If you can’t amass that big of a nest egg, make sure you don’t start collecting Social Security early at age 62. If you do that, your benefits could be permanently reduced by as much as 30%.
You can maximize your Social Security income by waiting to claim benefits until after your full retirement age. If you wait until age 70, the maximum benefit currently is $3,895 per month, which is almost $1,000 more than the maximum benefit for someone claiming benefits at the full retirement age of 66.
You Might Become Bored
Brett Anderson, president of St. Croix Advisors in Woodbury, Minnesota, and New Richmond, Wisconsin, said he often hears retirees complain about boredom. “They used to work five days a week, eight to 12 hours a day, and only had 52 Saturdays a year,” he said. “Once retired, now they have 365 Saturdays, and not everyone can golf seven days a week.”
Getting your financial house in order before retirement is important. “But don’t overlook how you’ll stay relevant or spend your time being impactful in your golden years,” Anderson said.