A recent Athene poll fielded by Kiplinger found retirees and pre-retirees have done some basic retirement planning but have more work to do when it comes to complex money issues.
Workers save for retirement for years, but are they overlooking some costly gaps in their planning?
To find out, Athene polled 730 people in or near retirement about their financial planning for their post-career lives. Many of them, ages 55 and older, have the basics covered. But it’s another story when it comes to more complex money issues, such as how to safely withdraw money from savings and managing the cost of long-term care.
Here are five ways to help address potential gaps in your retirement planning:
Safely draw from retirement accounts
It’s possible to spend 30 or more years in retirement. And one complex decision is how to tap IRAs, 401(k)s and other investment accounts — where most people hold their retirement savings — without depleting this money too quickly.
Our survey found that 46% of pre-retirees and 27% of retirees haven’t devised a withdrawal strategy.
As a starting point, you might consider the 4% rule, in which you take 4% from your portfolio the first year of retirement and adjust the dollar amount every year thereafter by the prior year’s inflation rate. For example, if you retired in 2023 with a $1 million portfolio, you would withdraw $40,000 that first year. If the annual inflation rate for 2023 is 3.5%, you would then withdraw $41,400 next year. This rule, which assumes a portfolio of half stocks and half bonds, is designed to make your money last 30 years.
This isn’t a hard and fast rule. You may want to take out less than 4% initially to be more conservative. Or you might reduce your withdrawals in years of poor market returns or give yourself a raise after your portfolio experiences several years of strong growth.
However, if you can only maintain your standard of living by withdrawing sizably more than 4% initially, you likely need to adjust your plan. You may have to reduce your spending in retirement, work longer to accrue more savings or get a part-time job in retirement to bring in extra income.
Build certainty into your plan
To help create more certainty in your retirement plan, you might consider maximizing your Social Security benefit, especially if you’re healthy and have longevity in your genes.
Claiming benefits as early as possible at age 62 permanently reduces your monthly check by up to 30% than if you wait until your full retirement age (67 for those born in 1960 or later). But every year you postpone benefits beyond your full retirement age, your payout gets an 8% boost until age 70. (Get an estimate of your future benefit by opening an online account at www.ssa.gov/myaccount.)
The survey found that many pre-retirees lean toward delaying benefits. While 40% say they expect to start benefits at their full retirement age, a significant 30% plan to wait until age 70. Only 11% plan to begin benefits at age 62.
These expectations, though, don’t match the reality of retirees polled, in which 41%, started benefits as early as possible, 27% waited until their full retirement age, and only 13% held out until age 70.
Some retirees have no choice but to take Social Security early because they need the income. But here’s where an annuity can help. You can purchase an annuity that can provide you with a monthly income in retirement, allowing you to delay Social Security.
Or, if you’re already receiving Social Security, ensuring your benefit along with annuity income are enough to cover basic living expenses can create more certainty in your plan.
Plan for long-term care
Long-term care could be one of your largest expenses in retirement. The annual median cost of care nationally is $61,776 for a home health aide, $54,000 for assisted living and $108,408 for a private room in a nursing home, according to a 2021 survey by Genworth.
You may never need long-term care, but you may want to plan for how to pay for it just in case. Yet our poll found that nearly one-third of respondents have no plan for managing the cost of long-term care. And 13% say they are relying on Medicare to pick up the tab, although the federal program doesn’t cover long-term care.
Of course, you can always pay for care out of savings. Alternatively, you can buy long-term care insurance. The American Association for Long-Term Care Insurance says the best time to do so is in your mid-50s when you’re still in good health and likely to qualify for coverage. Premiums also increase with age.
Many people, though, are reluctant to buy a policy they may never use. An option for them is a life insurance policy with a living benefit. You can tap the policy’s death benefit to help pay for long-term care if needed. And if you don’t need care or not much of it, your heirs can still receive proceeds from the life insurance.
You can also purchase an annuity to help defray the cost of long-term care. For example, many fixed indexed annuities offer a confinement care provision that can increase your payout if you are unable to perform certain activities of daily living.
Invest to help limit inflation’s impact
When asked for the biggest financial surprise in retirement, 53% of retirees cited higher than expected inflation.
Retirees generally shift to a more conservative portfolio over time. (Indeed, increasing cash savings to avoid market volatility is the most popular strategy by 37% of respondents to avoid running out of money in retirement.) But retirees could still need stocks to help keep up with inflation.
The right amount of stock in your portfolio depends on when you’ll need this money and your risk tolerance. One rule of thumb is to subtract your age from 120 to determine the percentage of stocks needed in a portfolio. A 65-year-old’s portfolio, for example, would be comprised of 55% stocks, with the rest bonds, cash, annuities, and other conservative options.
Get a second opinion
Just over half of respondents have worked with a financial professional to develop a retirement plan. That means nearly half are do-it-yourselfers when it comes to retirement, which could make it easier for them to overlook some planning essentials. Indeed, if retirees could do things over, half say they would save more while 40% would start planning earlier.
Working with a financial professional, even just for a periodic check-up, can make sure you’re on the right track and help you avoid gaps in your retirement plan.
