The COVID-19 pandemic has revealed just how economically vulnerable many Americans are. Tens of millions of workers have lost their jobs and have been forced to rely on government assistance in order to pay their bills. We should not be surprised by this. A Federal Reserve study found that 49% of adults in 2018 lacked the funds to pay for a $400 emergency expense. According to the Economic Policy Institute, nearly half of all working-age families have zero retirement account savings. These are disturbing statistics, and they suggest that many Americans are financially fragile and unprepared for a secure retirement.
As you approach retirement, there are warning signs that may indicate you are not financially prepared for a secure retirement.
No Financial Plan
Preparing for retirement is very much like planning for a very long trip. You can’t just walk out your front door and expect to arrive there. You need a plan.
A retirement plan has several important elements. It should incorporate your future living expenses (e.g. housing, utilities, health care, insurance, etc.) and your large, but variable, spending goals (e.g. home remodel, replacement vehicles, vacations). It should include your current and projected savings and your anticipated income sources (e.g. Social Security, pension, rental income). Your plan should have realistic assumptions for life expectancy, inflation, investment returns and tax rates.
A sound financial plan is vital to a secure retirement.
The best way to project what you will spend in retirement is to know what you are spending now and then adjust those numbers as if you retired today. For example, your mortgage may be paid off by the time you retire. So, you can remove that payment from your estimate for your expenses in retirement. But you will still pay property taxes and you need to include them in your budget.
Once you have a budget, you can check to make sure that you are saving enough for retirement. You should save first and spend what remains. Most Americans spend first and then save whatever, if anything, is left.
A budget is an important part of a secure retirement.
Carrying Consumer Debt
Americans live on debt. The Consumer Financial Protection Bureau reported that the average credit card balance in 2018 was approximately $5,700. According to Experian’s 2019 study, Americans carried an average personal debt of $90,460.
Given that credit card companies charge exorbitant interest on credit card balances, credit cards should be used only for payments and not to finance purchases. You should enter retirement with no consumer debt (i.e. credit card balances, auto loans, etc.), and home that has no mortgage. It is not too early to begin working towards becoming completely debt-free.
Carry no debt for a secure retirement.
No Social Security Plan
While the Social Security Administration is underfunded and at risk of not being able to pay all of its obligations, the benefits it pays provide basic financial security to millions of Americans. Social security benefits are unique, because they are guaranteed by the government, they are paid to you for as long as you live and they are increased for inflation. There is no other program like it.
Unfortunately, most people do not understand how Social Security credits are earned, how Social Security benefits are determined and how benefits can be maximized. If you have not reviewed your account with Social Security, you should do so. Make sure that your earnings history is accurate. Also, check your estimated future benefits and incorporate them into your retirement plan.
Most Americans take their retirement benefits at age 62, the earliest they can be taken. However, full retirement age (FRA) is 66 or 67, depending on when you were born. If you take benefits before you reach your FRA, your benefits will be reduced. Alternatively, if you wait beyond your FRA, your benefits will be increased. They go up by about 8% for every year you wait, up to age 70 at which point you must begin taking them.
A plan for Social Security is key to a secure retirement.
Want to learn more about retirement planning? Contact our team at Springwater Wealth today to learn how we can help you develop a plan for your financial future.
No Plan for Inflation
If you are fortunate to live a long life, you may spend 20-30 years or longer in retirement. You will find, as you have throughout your life to this point, that the cost of everything will go up. You need to plan for this.
Inflation in the United States over the past 100 years has ranged from -10.5% (1921) to 14.4% (1947). In recent years, inflation has been fairly tame. But it’s still present and your retirement plan needs to include a reasonable assumption for it.
Let’s assume that inflation will average 3% during your 30 years of retirement. If we assume that a gallon of gas costs $2.50 when you retire, we can project that it will cost nearly $6 a gallon in 30 years. If your property taxes are $5,000 when you retire, they will be over $12,000 thirty years into the future.
Anticipate inflation for a secure retirement
No Investment Plan
Unless you were lucky enough to earn a pension during your working years, you are probably going to be relying heavily on your savings and investments to pay for your expenses in retirement. How well have you been looking after your nest egg?
To be successful as an investor, your retirement portfolio should have an appropriate exposure (i.e. not too little, not too much) to the stock market. It should be well-allocated across global asset classes, well-diversified within those asset classes, built using low cost funds, and rebalanced no less than annually. Also, your portfolio should be allocated to your various accounts (e.g. taxable, IRA, Roth IRA) in a tax-efficient manner (i.e. asset location).
A sound investment plan is essential to a secure retirement.
If you are not feeling well-prepared for retirement, consider hiring a professional to assist you. Consider working with a CERTIFIED FINANCIAL PLANNER™ who can help get on track for a secure retirement.