Retired Life Isn’t as Easy as It Seems
So, you’ve worked really hard for thirty to forty years of your life and now, just want to kick back and relax in retirement, right? That dream might not be as easy as it seems. Here are a few problems that can derail your dream retirement and what you can do to fix them.
You Still Need to Pay Taxes
If you don’t have a regular income, you don’t have to pay taxes, right? Not exactly. If your retirement fund is pooled in a tax-deferred account, like a 401(k), you will have to pay income tax at a regular rate on your monthly withdrawals post-retirement.
Solution: Opt for Tax-Free Sources of Income
The simple solution here is to ask your employer to contribute to a tax-free account like a Roth IRA or a Roth 401(k). These accounts don’t need you to pay taxes on monthly withdrawals, making them more affordable after you retire.
You Need to Be Able to Spend Your Money
It’s nothing personal, but no matter how large your nest egg is, it means nothing if it can’t keep up with the cost of living or inflation. Most people neglect calculating their required monthly income before planning for retirement.
Solution: Make a Monthly Income Plan
Be methodical. Don’t assume that you’ll be spending less after retirement. Most people end up spending 80%-90% of what they did the year they retired, so save and plan for a monthly income of about as much as your last drawn paycheck.
You Might Run Out of Your Savings Sooner Than You Think
About one in five 65-year-olds alive today will live past the age of 90. That means, most seniors will probably spend decades of their life in retirement—enough time for their savings to run dry.
Solution: Always Plan for Longer
It’s better to have a larger fund that can last you longer than you expect. If you run out of savings halfway through your retirement, seeking out a job is no longer an option. Plan for longer, and you’ll always have enough funds when you need them.
Inflation Can Shrink Your Savings
Another common planning mistake, inflation can kill the purchasing power of your savings. If you want to maintain your current standard of living in retirement, you will have to account for everything becoming more expensive over the years.
Solution: Invest in Equities
The general rule is to invest in assets that have a higher percentage return than the rate of inflation. Equity (that is, stocks) consistently ranks as one of the highest-yielding assets you can own. However, be sure to only invest in reliable, well-known stocks and funds and keep your money invested for a long period.
You Might End up Needing Long-Term Care
So, you’ve planned for a large nest egg that can maintain your standard of living and keep up with inflation. That means that you’re safe, right? Perhaps not. If you’ve reached 65, there is a 50-50 chance of you needing some form of long-term medical care. If not planned for, these expenses can easily cut through your savings.
Solution: Get Long-Term Care Coverage
Whether it's a separate long-term care insurance policy or a part of your general life insurance policy, having some form of long-term care coverage (other than Medicare and Medicaid) can protect your finances in cases of emergency.
Make Room for Healthcare Costs
Aside from long-term care costs, an average 65-year-old couple retiring in 2022 would need about $315,000 to cover medical expenses in retirement. This cost should also be factored into your retirement savings plan.
Solution: Health Savings Accounts
One of the easiest ways to account for healthcare costs in retirement is to contribute to a Health Savings Account (HSA) when you’re working. An HSA allows you to withdraw funds tax-free for qualified medical expenses after you’re retired.
Relying Only on Social Security Is a Risk
According to recent figures, the average monthly social security benefit for a retired worker is around $1,976. This is clearly not enough to live comfortably, and the situation is worse if you have dependents.
Solution: Maximize Social Security Benefits
The first solution is to build a large nest egg of your own. If that isn’t possible, make sure you don’t start withdrawing your retirement benefits early. You can start withdrawing your benefits checks as early as age 62, but if you wait until 70, you can receive up to $4,555 in monthly benefits.
Boredom Is a Big Problem
Finances aside, boredom is the secret weapon that most retirees don’t anticipate. When you have 24 hours a day, 7 days a week to do practically nothing, life gets slow really fast. It is important to plan ahead about how you would want to create impact after you retire.
Solution: Make Your Own Bucket List
Write down all the things you’ve ever wanted to do and can realistically afford to do. Then, once you’re retired, work towards achieving each one of them. It’s an easy, efficient way to keep yourself occupied and avoid negative thoughts or depressive episodes.
You Might End up Relying on Your Kids
If you don’t plan ahead, you might have to become reliant on your adult children to provide for you. While most parents don’t expect financial support from their kids, many do turn to them in extreme circumstances.
Solution: Prioritize Retirement Savings
If you don’t want to turn to your adult children in retirement, don’t give them handouts at the expense of your savings. Rather than supporting your children after they’ve become adults, you can invest that money further into your retirement fund.
Going Back to Work Is a Possibility
As daunting as that sounds, in the current economy, going back to work has become a necessity for many retirees. It isn’t necessarily a bad thing, as working (even part-time) can help fend off boredom and give you a sense of purpose.
Solution: Find Work You Enjoy
You don’t have to necessarily return to the job you left off. There are many senior-friendly jobs that can help you explore your interests and get paid at the same time. Some seniors are also taking up freelancing and gig work, giving them more control over the type of work and hours they work.
You Might Be Forced to Make Withdrawals
If you’ve put all your savings into a 401(k), IRA, or SEP IRA, you may have to withdraw money even if you don’t need it. These funds require a minimum withdrawal every month after you turn 70-and-a-half, whether you need it or not.
Solution: Don't Put All Your Money in a 401(k)
Rather than going for a traditional IRA or 401(k), consider stashing your savings in a Roth IRA. If you have a Roth 401(k), you can convert it to a Roth IRA when you retire. These accounts are not subject to the required minimum withdrawals.
You Could Feel Guilty Spending Money
This is something no one talks about. If you’ve spent years pinching pennies to grow your retirement fund, having to dip into it when you retire can bring with it a lot of guilt. Shifting out of your frugal mindset will not be easy either.
Solution: Create a Budget
It may seem like a simple solution, but it’s no less effective. Having a cap on the maximum and minimum spending for each month allows you to spend your hard-earned money without guilt.
You Might Lose Touch With Your Friends
Money can become a wedge in friendships after retirement. When you’re working, you mostly earn as much as your friends (who are usually in similar careers). However, post-retirement, how much you can spend depends on your individual savings habits. If your friend saved better in their career, you might find it harder to keep up with their lifestyle.
Solution: Be the One Making the Plans
A simple way to circumvent this would be to be the one setting the budget for activities. Always be the first one to make suggestions and keep them under your budget.
Sizing Down Might Not Work Out
Once the children have flown the nest and you’ve retired, moving to a smaller home is economical, but it often turns out to be a bad idea. People end up spending years, moving from place to place, trying to find the “perfect” home, and end up wasting time, money, and energy.
Solution: Test Out New Locales Before Moving
Before selling your home, consider renting for a couple of months in the area you want to move to. This can give you a lay of the land and familiarise you with the lifestyle of the city while keeping your options open.
