According to a 2022 Gallup poll, the average age among retirees is now 61, up from 57 in the 1990s. The average expected retirement age among non-retirees is now 66, vs. 60 in 1995. There are a few reasons for this shift to later retirement dates. First, changes in Social Security payouts enacted in the 1980s are coming into play for today’s workers of retirement age — and they’re incentivizing people to stay employed longer to maximize monthly benefits post-retirement. Then, despite a slight reversal during the COVID-19 pandemic, generally longer lifespans are causing people to work longer and save more money to fund a retirement that could last 10, 20 or 30 years — and especially as the cost of living is increasing. Finally, a shift from the manufacturing economy to one focused primarily on delivering services and information means that many are opting to work longer — their jobs are not as physically demanding.
Whatever your target retirement date is, you need to start developing a strategy today that will put you in the best possible position to retire on your terms.
Here are five considerations that can help you become retirement-ready:
1. Review where you are relative to your retirement goals.
Think about how long it will take to realistically get to them and decide if continuing to work makes sense. Some people use broad savings factors to help gauge their progress toward retirement. A common approach is to save enough to generate a high percentage of your pre-retirement income (say 80% to 90%). Other planners use blunt, back-of-the-envelope calculations of saving, say, 3 times your starting salary by age 40, 6 times by age 50 and 8 times by age 60.
Both methods are imprecise, because they ignore how the timing of expenses impact your spending in retirement. For example, in the early years of your retirement, you’re likely to spend more, then taper off, and then rise again as health care needs go up. Savings factors also largely don’t consider inflation. Inflation was on the back burner for 20 years, but inflation is now a critical factor in retirement planning.
2. Be clear-eyed about your health.
In our culture, we tend to think of health as one issue and wealth or retirement planning as another. Yet many of us now realize just how closely health and wealth are linked. Family history, diet and exercise all factor into life expectancy. As advisers, we’re convinced that poor financial well-being can lead to poor health, and vice versa; one of the saddest things we see is people retiring in poor health and not able to enjoy the money they’ve spent a lifetime working for.
By 2060, life expectancy for the total U.S. population is projected to increase by about six years, from 79.7 in 2017 to 85.6 in 2060, according to the U.S. Census. It’s safe to say that many people forget to budget for increasing health care costs as they get older. Longer estimated lifespans can mean a longer, more meaningful retirement for many, but it will also require more savings and investment. Careful planning is needed, especially in the areas of community-based housing options and support systems and assessing long-term transportation needs.
3. Get your portfolio “tax-ready.”
The “Three A’s” of “Amount, account and asset mix” are critical factors when saving for retirement. Taxes paid as a result of your account selection could wind up being your biggest expense in retirement, without careful planning.
It may take a few years to properly diversify your tax position among three primary account options:
— Tax-deferred: Contributions and earnings aren’t taxed until the money is withdrawn, at which point you’ll pay ordinary income taxes on any distributions. Think of a traditional IRA, 401(k), or 403(b) plan.
— Tax-advantaged: You can reduce future tax liability by paying taxes up front. Under certain conditions, distributions are tax-free. These include Roth IRAs and Roth 401(k)s.
— Taxable: These accounts are liquid and easily accessible (and there’s no age restriction or penalty for early withdrawals). Earnings and realized gains are taxable at year-end, although at generally more favorable rates than ordinary income (in some cases). These accounts include your primary bank account or brokerage account.
Ideally, you’d want to spread your assets more or less evenly across these three buckets, as it will give you more flexibility to optimize withdrawals depending on the prevailing tax environment.
4. Work towards becoming debt-free.
You will be living on a fixed income in retirement, so being debt-free can be appropriate for many people — but it’s not a “hard and fast” rule.
Some debt can be good debt. The key isn’t to avoid it, but to make sure the debt you do take on will improve your finances, ability to earn a living and/or quality of life over the long haul.
We like to divide debt into two broad categories:
— Inefficient debt is easy to define. It’s exemplified by the overuse of consumer credit cards, which usually offers no long-term benefit to you. For example, you can’t deduct interest payments on your tax returns; and there’s probably no appreciation in value on the items you buy. High interest rates themselves can be onerous: according to recent reports, U.S. consumers pay an average interest rate of 24.10% on their credit cards. Plus, there’s the lost opportunity to do something more productive with your money: What investment can reliably return 24% a year?
Before you retire, make a concerted effort to pay off credit cards in full, so that recurring interest charges don’t create a drag on your precious retirement income.
— Efficient debt has four characteristics: it generally carries a lower interest rate than you can reasonably expect to earn on your blended investment portfolio (stocks, bonds and cash); it’s used to purchase goods or services that are likely to increase in value (such as a new home or college education); interest payments may be tax-deductible (such as a home equity line that’s used to make improvements to the home); and it allows for amortization if payments are made over time.
5. Think about Social Security eligibility.
Knowing the amount of your Social Security benefit, and how it could change over time, will help you determine how much other retirement income you’ll need to generate from your savings and investments to reach your goals. Depending on when you were born, Social Security full retirement age is 66-67. The longer you wait, the higher your monthly payment.
There are lots of media reports about the risk of Social Security’s trust fund running out of cash in 2034. The fear of assets running out is causing some to claim benefits early. But claiming benefits before full retirement age could be a gamble.
Social Security is an important source of retirement income, but it cannot be the only source. In fact, benefits are designed to replace only about 40% of your pre-retirement income. Even that’s not completely accurate, because Social Security benefits don’t replace the same amount of income for people across all income levels. High-earners get a far lower percentage of replacement income than lower- and middle-income workers.
It’s helpful to think of Social Security as one leg of a three-legged stool. Your workplace and individual savings are the other two; they will be responsible for funding a much greater share of the income you’ll need to sustain a comfortable retirement.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO 830 AM on Sunday mornings. Email Bruce and Peg at [email protected]. Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.
