The U.S. has gone through several economic crises that put a lot of Americans into the gutter. While it’s been more than eighty years, the memories of The Great Depression are still vivid today. Indeed, it has taught most of us a tremendous and painful lesson that will always linger.
But in the following decades, notable booms, bubbles, and crashes transpired. The dot-com bubble, The Real Estate Bubble, and The Great Recession are some examples. Now, the pandemic crisis and inflationary pressures are again testing policymakers.
Unfortunately, American retirees tend to be the most vulnerable to economic crises because most are on a fixed income. For instance, older Americans comprised 25% of bankruptcies in 2009. The same trend was visible in 2020, as shown by a survey of OECD member countries.
Studies have also shown that senior bankruptcies have increased five times in the last thirty years. This year, US retirees are again at risk as inflation reduces purchasing power and increases volatility in the stock market.
The financial literacy of Americans has not been great. Many near-retirement adults were confident about their financial literacy before the pandemic, but disillusionment followed.
The good news is that youth and adults alike are becoming more interested in personal finance education. Some turn to financial advisors to understand the value of retirement planning, retirement accounts, stocks, and insurance. But, their savings are still lagging behind the standard of living.
The State of Retirement in America
Over the past decade, the percentage of American retirees has risen. It could be due to the full recovery from The Global Financial Crisis. The economy was in excellent shape, with stable inflation, interest, and unemployment rates.
However, the trend has become more parabolic in 2020. Many Americans stepped out of the labor force or were forced into retirement. Of the five-million labor force drop, 3.3 million were excess or early retirees, primarily due to business shutdowns.
The trend in 2022 is the exact opposite of the movement in the last two years. Small business openings, digital transformation, and the easing of pandemic-related restrictions likely contributed to that.
Earlier this year, the share of those retiring due to joblessness fell to 28.2%. For better or worse, the percentage of American retirees continues to decrease amidst inflationary pressures. Many Americans plan to delay or wait for the perfect time to retire.
On average, the full retirement age in the US is 66 (up from 62 in 2002). Many of those nearing retirement age fear inflation may raise the prices of goods and services.
Healthcare costs and long-term care may become more expensive, leading to more bank withdrawals and depletion of their retirement savings. Social security and retirement benefits may not be enough for their preferred lifestyle.
In addition, the compounding interest rate hikes have increased the cost of borrowing. As a result, many feel that they have to work longer to grow their nest eggs.
The retirement delay of many American seniors is likely evidence of inadequate financial capacity. Thirty percent of retirees have no retirement savings, and over 70% of retirees are in debt.
As of 2022, 65% of retirees report moderate to high financial insecurity. In addition, 51% said their savings were low relative to the life expectancy in the US. Many Americans will likely have to make a massive adjustment in their living standards as they approach or enter retirement.
However, the lack of savings is not solely caused by limited financial awareness. Other contributors are external, such as the pandemic crisis and natural calamities. It also doesn’t help that not all companies have employer-sponsored retirement savings plans.
The survey says employers of 31% of retirees did not offer a 401(k), traditional IRA, or Roth IRA plan. Of the 67% that expressed regrets about their finances, 52% wished they knew better about investments and retirement savings.
Despite these findings, it is not too late to build financial security. Let’s start by looking at some retirement facts; then, we’ll discuss how to best prepare for retirement.
Top Retirement Facts You Ought To Know
Most people look forward to their retirement. It means not having to set your alarm clock or commute to the office. You have the time to relax, play word unscrambling games, and do anything else you want to do.
However, you need to be financially prepared if you want stability during economic volatility. Unless you have a business that will continue operating, you’ll have to rely on limited financial resources. That said, there are many things you must know (and prepare for) before retiring.
Every half-year counts
Putting aside as much money as early as possible is the best way to prepare for a smooth retirement – no matter how far off it may seem. Starting to save early is particularly important if you decide to retire earlier than the average retirement age. In the same Yahoo Finance survey, 45% of retirees said they regret waiting too long before saving for retirement.
As you approach retirement age, a year narrows down into a half-year because many retirement regulations revolve around half-years. For instance, withdrawals from a traditional IRA or 401(k) may be subject to an early-withdrawal penalty unless you wait until you’re at least 59 ½ years old. Meanwhile, you may get the required distributions from IRAs and 401(k)s when you turn 70 1/2 years old.
Retirement could last a long time
The full retirement age in the US is 66 (or 67, depending on when you were born), while the average life expectancy is 79 years old.
However, life expectancy may increase to 80-81 years old in the next few years. So, if you retire at 66, you still have an average of 13 years ahead of you. You should prepare for a retirement period of at least 20 years to ensure your savings will not run out.
Prepare for emergencies
Aside from meeting your daily needs for however long you have left, your savings should also cover emergencies. You may also need more than the bare minimum to sustain your preferred lifestyle as you age. In other words, you’ll want to pad your savings as much as possible to provide the financial stability you’ll need in your retirement years.
There are many ways to prepare for retirement
Opening a savings account is one way to save for retirement. As of 2022, 71% of Americans have savings accounts in banks. Yet, problems arose when inflation started to peak in early 2022. Due to rising prices, almost 70% of Americans depleted their savings at varying levels.
Aside from a savings account, you may also open an individual retirement account or IRA. Additionally, you could take advantage of an employer-sponsored retirement savings plan if you are employed.
Multiple vehicles are available for amassing retirement savings. The best one for you will depend on your financial status and personal goals. Whatever option you choose, committing to saving money is what matters most.
The number of retirees spending on hospitalization is high
As people get older, illness and hospitalization become pressing concerns. Americans aged 65 and older comprise the largest portion of hospitalizations. They are also more than twice as likely to get hospitalized than their younger counterparts, and hospitalization costs rise yearly.
Aside from COVID-19, cardiovascular diseases are the leading cause of hospitalizations. Statistics show that heart and blood conditions rank second in the leading causes of activity limitation. Over 30% of adults have high blood pressure, and it’s prevalent among Americans at 45-64 years old.
As a result, health insurance premiums also rise as we age. As a result, many older adults face increased spending on their healthcare, so you need to plan for that.
Medicare may not cover all healthcare costs
Enrollment in Medicare is vital for those approaching 65. This federal health insurance program covers healthcare services for people 65 and above and permanently disabled people of any age.
With Medicare, you typically pay much lower premiums than for private insurance. As of 2022, 62.6 million Americans, or 18% of the population, are Medicare enrollees.
However, Medicare does not always cover the entire cost of healthcare. You may have out-of-pocket expenses or copayment, typically a fixed amount for specific services. Your copayment depends on a few factors, including your chosen Medicare plan.
Additionally, healthcare costs can exceed the maximum amount that Medicare covers. Pre-pandemic, the average hospitalization cost was $285,000, meaning you could face staggering healthcare costs even with Medicare coverage.
Additionally, you should know that Medicare does not cover some critical health needs of retirees. These include long-term care, dentures, and hearing aids. Since 70% of seniors need assisted living care, that could be a significant financial problem.
The average cost of assisted living facilities is $4,500 per month. Unfortunately, Medicare does not cover any of it unless you have Medicare Advantage. Even then, it may only pay a portion of assisted living costs for a limited time.
While Medicare covers many healthcare costs, it stops short of paying enrollees for long-term or custodial care. When planning your retirement, make sure you include the costs of all excluded medical and healthcare expenses under Medicare.
Many retirees are still working
The pandemic forced many elderly employees into early retirement. But as restrictions ease and inflation intensifies, many retirees returned to work. These include those who delayed their retirement and the 1.5 million early retirees who returned to the rat race.
That is likely a significant factor for the Labor Force Participation Rate of those aged 55-64 rebounding to pre-pandemic levels. It may also be a good indication of how few Americans are ready for retirement.
Relying on Social Security may be a mistake
For many retirees, Social Security benefits are their primary source of income. The Social Security Administration reports about 65 million Social Security beneficiaries as of June 2022. Most of them are retirees and direct beneficiaries of retirees.
However, these benefits may not be enough for many people. The average American household spends about $61,000 a year, roughly $5,000 a month. On the other hand, the average Social Security check will be $1,547.87 in 2022. Add the increased healthcare costs, inflation, and taxes, and the gap between what you need and what you get widens considerably.
How To Prepare for Your Retirement
While the facts above may paint a grim picture of retirement, there are many things you can do to prepare better for a stable retirement.
Start saving and investing now
The YOLO acronym – “you only live once” – has been widely used to justify taking risks and living impulsively. While it’s undoubtedly important to seize opportunities and make the most of our time on earth, we must also remember that we may live longer than expected. This is especially relevant when it comes to retirement planning.
You can take advantage of compounded interest by saving and investing as early as you can. This powerful yet underused tool can help grow your wealth over time.
In addition to the financial benefits, regularly saving money can also help improve your self-discipline. Saving is not always straightforward, especially when you’re not used to it. Yet, the urge to save intensifies over time as you see your money in the bank grow.
Take advantage of company-sponsored retirement plans
Company-sponsored retirement plans allow you to set aside money from each paycheck. Some employers even match your contributions up to a certain amount. This can be an excellent way to build a nest egg, so take advantage of it when offered.
While there are many company-sponsored retirement plans, 401(k) and pension plans are the most common. A 401(k) plan lets employees contribute pretax dollars to a tax-deferred account.
Pension plans, also known as defined-benefit plans, are funds set aside by employers based on a percentage of an employee’s average salary. These plans provide a guaranteed income stream in retirement.
As medical advances allow us to live longer, many are spending more time in retirement than ever. This often means we need to have a solid financial plan to maintain our lifestyle. One way to do this is by purchasing insurance.
Insurance creates an extra layer of financial protection during unforeseen circumstances. It includes accidents, sicknesses, and natural calamities. When these happen, your savings and investments remain intact. Insurance can lower stress levels because you know you have a safety net if something happens.
Typical insurance policies include life insurance, health insurance, annuity, and property and casualty (P&C) insurance. The number of Americans with insurance is over 300 million today.
In addition, you can use insurance as a retirement planning tool. For example, some policies build up cash value over time you can use to supplement your income in retirement. Others offer death benefits to help our loved ones cover expenses if we pass away.
As you head into retirement, carefully consider your insurance needs to ensure you have coverage that best meets those needs. By doing so, you can ensure you’re ready for whatever life may throw your way.
Invest but stay liquid
When it comes to retirement planning, people can use many different strategies. One approach is to invest in stocks, bonds, and real estate. These types of investments can potentially yield high returns, which can help build up retirement savings.
However, a golden rule in investing is to commit only money you can afford to lose. In retirement planning, that means the disposable income you have not earmarked for your retirement savings.
Always ensure you are liquid, meaning you have funds available immediately to cover any unexpected needs that might come up. Working with a fiduciary, CPA, or attorney can help you make informed investment choices for your retirement planning.
When done correctly, investing can be an excellent way to secure your financial future. Keep your long-term goals in mind, and don’t take on more risk than you can afford.
Study the usual needs of a retiree
Many look forward to retirement as a time to relax and enjoy the fruits of their labor. However, retirement can quickly become a morass of financial stress without adequate preparation.
To ensure your comfort, find out the specific needs of retirees. In addition to basic living expenses, you must also consider the costs of healthcare, assisted living, traveling, and leisure activities. It would help if you also created an estate plan to avoid legal and tax conflicts with your retirement income and savings.
Learn More About Retirement Savings
A reliable source of income is more important than ever before for seniors. The economy’s volatility has made it painfully clear that you can deplete wealth quickly. Strategic savings, investments, and insurance are essential to secure our financial security during times of need.
Retirement planning can be complex, but you can achieve your desired retirement goals with proper research and financial strategies.