retirement planning

I was swept under a wave of anxiety when I came across the MarketWatch headline. “Half of Americans over 55 may retire poor.” Will I be broke when I retire? That would be a drag. But, I’m young enough to not make this a reality.

Then, I got really concerned. What about my parents? They are, after all, right on the cusp of retirement.

After taking some deep breaths, I did a little more digging. A Forbes article seemingly debunked the MarketWatch piece. But, still. There were plenty of other stats that did in fact prove that our parents will have turbulent retirement ahead of them.

Case in point, a Newsweek article published on August 22, 2020, that shared the following eye-opening facts:

  • Americans are getting a late start with no defined retirement goals. “Most of us don’t know how much we’d need post-retirement,” states the article. Why? Because “there’s a huge gap between when we think we can retire, and when we actually can. While Americans wish to retire by 50, most end up working till 65 or even 70.”
  • Social security is expected to run out by 2034. If you’ve been paying attention, people have been echoing this sentiment for years. While some, like the AARP, have argued that this has been an exaggeration you still shouldn’t bank on the government to fund your retirement.
  • Around 3.6 million Americans retire annually. Many people have had to retire earlier than expected thanks to COVID-19 — what between layoffs and health concerns. As a result, they may not have reached their savings goals and are now forced to take a bite out of their nest egg.
  • The average 401(k) value is equivalent to senior healthcare costs. “The national 401(k) asset value plunged below $100,000, which is equivalent to healthcare costs for seniors!” notes the article. That’s concerning because this happens to be the “largest retirement vehicle for most households.” And, long-term care costs are also rising faster than inflation.
  • Only 31% of people above 65 use a financial advisor. Why’s this a problem? “Financial advisors can curate detailed future plans based on your goals,” explains the article. “They can prevent you from making emotional decisions, help you choose the right funds or the type of investments, and even squeeze money out of a tight budget.”

As if that weren’t alarming enough, another study found that most people are expected to outlive their savings.

“The average American is expected to run out of savings at some point during retirement, says a new report from the World Economic Forum,” writes Katie Brockman for the Motley Fool. “Most U.S. retirees will likely outlive their savings by around eight to 10 years, according to the study, but that’s assuming a life expectancy of age 85. Retirees who live longer than that could potentially spend even more time in retirement with no savings.”

That’s a double-whammy when you factor in that Americans are way behind on savings.

“Between two stock market crashes and not saving enough in the last 16 years, coupled with increased expenses and inflation, Americans are very far behind on saving for retirement,” explains Carlos Dias Jr., founder, and managing partner of Dias Wealth LLC.

Is retirement as bad as it seems?

Before you dive into a panic-induced tailspin, not everyone believes that Americans aren’t prepared for retirement.

“Americans have never been better prepared for retirement,” states Allison Schrager, senior fellow, Manhattan Institute. “In the past, employer-provided defined benefit pensions may have provided a secure income to the minority of Americans who had them—but participation peaked at 39% of employees in 1973. Today, more than half of households participate in a retirement plan, most of them defined contribution plans like a 401(k).”

“As the first generation to rely on defined contribution plans reaches retirement, they have more retirement income than previous generations, and elderly poverty stands at an all-time low,” adds Schrager. “There is no need to expand Social Security, which is already responsible for a large share of projected future deficits. Social Security was never meant to be the sole source of Americans’ retirement income, and it is not desirable or efficient to make it one.”

Moreover, Schrager says that the average retiree has more than ever. “Looking across all sources of income (including Social Security, retirement plans, and other forms of savings), most retirees are doing better than before,” she elaborates Research “estimates that 70-year-olds in 2011 had more income than they did in 2000.” And, this trend continued from 2000 to 2011.”

“The median 70-year-old’s income increased from $30,710 to $33,908, while those at the 25th percentile saw an increase from $15,341 to $17,225, and those at the 75th percentile saw an increase from $51,360 to $56,522.”

And, “as retirees age, most continue to be better off than in the past.”

“From 2010 to 2016, pretax income rose by 5.0% for the median 80-year-old, 8.4% at the 75th percentile, and 12.2% at the 90th percentile,” Schrager adds. “Pretax income did fall by 0.8% at the 25th percentile and by 6.6% at the 10th percentile.” However, “lower-income seniors are still less likely to be destitute than in the past.”

Do your parents have enough money for retirement?

I’ve thrown a lot of information your way. And, just like you, I’m just a little baffled. Are people prepared for retirement or not?

You’re not going to like this answer. But, I don’t know.

The fact of the matter is that the pandemic certainly put a kibosh on most people’s retirement plans. Again, a lot of people had to make the difficult decision to retire early. Even if you weren’t close to retiring, you may have been a part of the 60% of Americans who withdrew or borrowed money from an IRA or 401(k) during the pandemic, and nearly two-thirds of those who withdrew funds used the retirement savings to cover basic living expenses.

What’s more, a lot of folks are behind on their savings. And, they might not be able to rely on pensions or social security.

However, that doesn’t mean that they don’t have stashed away for retirement. It just depends on factors like:

  • When you plan to retire. “The age you plan to retire can have a big impact on the amount you need to save, and your milestones along the way,” notes the folks over at Fidelity. “The longer you can postpone retirement, the lower your savings factor can be.” The reason is that “delaying gives your savings a longer time to grow, you’ll have fewer years in retirement, and your Social Security benefit will be higher.”
  • How you want to live in retirement. If your parents plan on downsizing, like moving into a smaller home, that means their expenses will go down. Or, if they want to travel the world and reside in a resort town, then they’re going to need a cushy nest to enjoy this lifestyle.

If you want a specific figure, studies show that you’ll need $1.7 million to retire. However, as a general rule of thumb, Fidelity recommends that you “save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.”

If your parents want some peace of mind, then they should meet with a financial advisor who can help them develop a plan to reach their retirement goals. They can also use retirement calculators from Vanguard, Bankrate, Nerdwallet, Schwab, or the AARP to help them calculate the value of their retirement fund. You can also check out our annuity calculator.

Having the retirement conversation with your parents.

As Albert Einstein once said, “Assumptions are made and most assumptions are wrong.” By that, I mean the only way that you’re going to know if your parents have enough money for retirement is to just ask them.

Sure. This will not be an easy conversation. Your parents may even sidestep having it with you. But, having the retirement talk is an absolute must.

Here’s where to start:

  • Keep your emotions in check. You may be angry or upset that your parents put themselves in this situation. But, until you have all the facts, work through your emotions before talking to them. You want the conversation to be meaningful and informative.
  • Don’t go it alone. You’re not exactly staging an intervention. But, it might be helpful to have others involved, such as siblings. A third party, like a financial advisor, can provide helpful backup.
  • Be direct. This doesn’t mean that you should show your parents tough love. Instead, it’s asking them directly if they have a retirement nest egg. If so, how much do they have saved, and what their investments are. You should also find out pertinent information like health and life insurance, how much debt they have, and what their long-term goals are.

If it appears that your parents are on the track, you may only have to periodically check-in on them. If they don’t have enough money for retirement, you’ll have to take action and come up with a retirement plan by:

  • Meeting with an advisor so that they can review your parent’s portfolio and make suggestions on how they can meet their financial goals.
  • Stop the bleeding. Help them eliminate debt, such as credit cards, through consolidation or interest repayment programs. If they aren’t straddled with debt, they can contribute more towards their retirement.
  • Creating a budget so that they can reduce unnecessary spending and live within their means.
  • Boosting retirement income. If possible, see if your parents can delay retirement by a couple of years or pick-up a second job. Their investment portfolio should also be diversified.
  • Finding hidden benefits and money. Your parents should be eligible for senior discounts, tax relief, or even benefits like a widow’s pension. They may also have unclaimed 401 (k) accounts. And, the IRS does permit catch-up contributions.

Most importantly, don’t jeopardize your own financial future. If you don’t have the money to support your parents financially or help them bolster their savings, consider alternatives. You could take them to doctor’s appointments or have them move in with you. And, make sure that you are also working with a financial advisor so that you’ll have enough money for your own retirement.

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John Rampton is an Entrepreneur and Connector. John was recently named Top 50 Online Influencers in the World by Entrepreneur Magazine, Finance Expert by Time and Blogging Expert by Forbes. He is the Founder and CEO of Due.

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