For most people, thinking about retirement isn’t all about peaceful white sand beaches and flip flops. In fact, retirement planning is the number one source of financial stress for the majority of Americans, according to research by Charles Schwab. Here’s how to handle four top retirement worries.
Retirement Worry #1: You’ll Outlive Your Savings
The Worry: Almost half of Americans worry they won’t have enough money to see them through retirement, according to a 2019 survey by the Aegon Center for Longevity. This is an understandable fear, considering almost 40% of Americans have less than $5,000 in retirement savings, Social Security’s future keeps growing increasingly uncertain and people are living longer than ever before.
“No one intends to spend the last 10 years of their life worrying about finances, but that’s what can happen if a retiree lives to 90 instead of 75,” says Phil Lubinski, certified financial planner (CFP) and head of retirement income at WealthConductor.
The Solutions: Annuities can provide steady paychecks for a set number of years or for the rest of your life. A qualified longevity annuity contract (QLAC) is a type of deferred annuity specifically designed to provide you with guaranteed income later in life, offering peace of mind if you’re worried that your retirement savings might not last for the long term.
If you don’t have one already, now could be the right time to enlist the services of a financial advisor who specializes in retirement income. More specifically, Lubinski recommends investors seek out advisors who specialize in a strategy called segmentation.
“Segmenting a retiree’s lifetime into multiple time horizons and creating separate investment portfolios for each segment of time provides retirees with a clear plan,” he says. “Using segmentation, retirees know how much income they will be receiving in the future and the specific portfolio that will provide the income.”
Retirement Worry #2: Your Investments Won’t Keep Up
The Worry: Even if you feel like you’re saving enough for retirement, you still might be concerned about whether your investments can provide enough income when you need it. Yes, the stock market has historically delivered a certain rate of return, but what if a recession strikes right when you plan to retire?
“The Covid-19 pandemic has illustrated how previously stable stocks, such as airlines and hospitality businesses, can plummet due to unforeseen circumstances,” says Lubinski. If nothing is a sure thing anymore and the dividend-paying stocks many income investors have long relied on cancel their dividends, how can investors have confidence that their investments today will be able to support them in retirement?
The Solutions: While there’s very little you can do about the broader economy, you can take steps now to give your investments the best chance of performing well over the long term. First, understand your asset allocation. The way you choose to distribute your portfolio among different asset classes plays a significant role in how your portfolio will perform.
If you don’t have enough exposure to the stock market through equity funds, for example, your rate of return may fall behind. Depending on your age and risk tolerance, you’ll want a different portfolio composition to allow for enhanced growth or to lock in certain gains. For more, see our guide on how to invest for retirement.
Next, make sure you pay attention to the expense ratios of your investments. The more you’re paying to fund expenses and fund managers, the less you have working for you in the market. While not all fees are bad (and some are unavoidable), you may be able to find index funds or ETFs that align with your goals and charge lower fees. This can save you potentially hundreds of thousands of dollars over the life of your retirement savings.
Retirement Worry #3: The Rising Cost of Medical Expenses
The Worry: Many worry that rising medical expenses could deplete their retirement savings. For instance, Fidelity estimates a couple might need almost $300,000 in today’s dollars just to cover medical expenses in retirement. And medical costs are rising at a rate that’s well above average inflation, meaning you may need to have even more set aside for when you retire.
“Even the best retirement income plans can be derailed by a bout of cancer or illness such as Covid-19,” says Lubinski. And it’s not limited to your own illness. Paying for a spouse’s care could put a sizable dent into your shared nest egg.
The Solutions: If you’re concerned about mounting health care costs whittling away your retirement savings, you’ve got a few options. You might consider certain life insurance coverage or even long-term care insurance to help brace your savings. A financial advisor can help you review these options.
You should consider speaking with your advisor about long-term care options between ages 45 and 50, according to AARP. And if you’re going to buy it, aim to do so by age 65 to balance costs and benefits.
Outside of paying for additional insurance, you also may want to start maxing out a health savings account (HSA) if you’re in a high-deductible health plan. HSAs allow you to invest pre-tax funds, much like you would in an IRA. You can then withdraw from your HSA tax-free as long as you use the money for qualified health expenses. This makes HSAs particularly well suited to growing money over time for later-in-life medical expenses.
Retirement Worry #4: The Death of Your Spouse
The Worry: The unexpected death of a spouse can cause more than emotional grief for those approaching or in retirement. It can also drastically impact your retirement income and taxes.
“In addition to the cost of healthcare and hospice, surviving spouses often wonder whether they will have enough money to cover their new expenses and offset the reduction in Social Security benefits and pensions,” says Lubinski. “Many surviving spouses aren’t aware that even if their income stays the same, their income tax liability will increase due to the change in their filing status.”
The Solutions: To keep fears surrounding losing a loved one at bay, have conversations with your financial advisor about strategies to maintain income and create a cushion for the change from filing taxes as married filing jointly to single.
For instance, having a good life insurance policy in place can help you and your spouse with a number of things, including income replacement, cost of living funds, mortgage repayment and financial peace of mind.
Beyond life insurance, make sure you’re familiar with all of your retirement income flow. Using the Social Security website and any pension plan documentation, you can get an idea of what survivor benefits look like and how they may affect your income.
You might also consider proactively downsizing to cut costs in retirement. Moving into a smaller, less expensive house or reducing lifestyle creep can help you feel financially secure, should your spouse die and your income change.
Don’t Let Your Retirement Worries Get You Down
If you’re concerned about having the resources you need in retirement, hiring a financial advisor and working out a plan could be the best way to cope with these worries.
“There’s a lot of excitement that comes with thinking about retirement—along with a lot of fear of the unknown,” says Ken Cella, principal with Edward Jones Client Services Group. “But now, more than ever before, retirement is far more than a destination or an endpoint; it’s the beginning of a new journey.”
Preparing for this new journey, Edward Jones research has found, consistently makes it more likely that retirees will respond they’re enjoying a higher quality of life in retirement, even in the face of a global public health crisis.
“In our recent retirement survey, we saw that 84% of survey respondents who are working with a financial advisor already found a greater sense of comfort regarding their finances during the uncertainty of this pandemic,” he says.