Are You Safe to Retire?

As stocks drop and prices rise, there’s a lot of talk about annuities.

Some people speak about annuities like they’re the answer to all your problems.

Others think it sounds too good to be true.

It’s fair to be skeptical about any financial thing that has a guarantee.

We’ll look at a few good points and words of caution as you consider them for your financial plan in just a moment.

First: what exactly is an annuity?

An annuity is primarily an insurance product—so they can give a guarantee based on the money coming in from participants. Like life insurance or any other kind of insurance, you will get what’s in your contract.

Every annuity also has two phases. In the first phase (accumulation), you have your part to play. You pay—all at once or over a period of time—a premium for your annuity. The more you put in, the more you get out.

In the second phase (annuitization), the company upholds its end of the bargain: it gives you the agreed upon amount each year.

The structure seems simple enough, but there are multiple types of annuities with a ton of options, and not every agent sells every type of annuity. It’s in this multitude of options that things can get confusing, and people can make assumptions that aren’t true..

The state of retirement

Overall, the economy is not being kind to those in or nearing retirement. According to T. Rowe Price’s 2022 Retirement Market Outlook, there’s a 4 trillion dollar gap between what people have saved for retirement and what they need.

The gap is due to many factors…

  • 13% of people 60 and over have no savings, according to the Federal Reserve.
  • Not all employers offer retirement plans–as many as 33%, according to the U.S. Bureau of Labor Statistics. People are much more likely to contribute to their retirement savings if their company offers a plan and if the plan auto-enrolls their employees.
  • There can be unequal wages due to race or gender, and that affects savings. For example, according to the Federal Reserve, 81% of white households have retirement savings, but only 64% of black and 61% of Hispanic households.
  • In a Bankrate survey, 20% of people needed to tap into retirement accounts during the pandemic. It can be hard to recoup what they borrowed, especially if they missed the best days of the market.

Unfortunately most employers don’t offer employees the financial resources to make sense of the picture themselves, even though 53% of employees want retirement guidance, according to Willis Towers Watson’s 2020 Global Benefits Attitudes Survey.

The best help will come from an independent fiduciary advisor who can look at your entire picture and must work in your best interest.

But if you have some savings, how do you know it’s enough? What do you need to consider in retirement?

How much do you need?

On a big picture level, the average estimated amount needed for a comfortable retirement is just over a million dollars.

If that worries you, only 10-16% of households have that amount. So you’re not alone.

Also, a “comfortable retirement” doesn’t mean the same thing to everyone.

Do you want to travel? Do you want to maintain your current standard of living? Are you a modest person? Do you want to downsize and live a quiet life? Do you want to buy a second vacation home on the beach? Do you live in New York or Montana?

All these factors play into what you personally need.

So instead of an average number, it’s a better idea to start with some sort of worksheet or calculator to have a starting place for your lifestyle.

What costs are there?

The #1 expense to remember is health care. Between Medicare, prescriptions, and the possible need for Long Term Care, the medical bills in retirement add up quickly.

And Medicare doesn’t cover long term care. Don’t make that mistake.

According to studies by SmartAsset, overall the expenses when you retire will decrease – except for taking cash, buying reading materials, and health care.

The exact spending will vary by household, but unfortunately health isn’t something entirely in our control.

There are some smart choices to make to keep in shape.

But none of us can tell how our health will go in the future, whereas you can choose to spend more or less on entertainment and travel.

You might live in excellent health until you’re 100 (in which case, your savings will need to last longer!) or you might need 3 years of a facility’s dementia care (which costs a pretty penny, too).

Another expense you’ll have to tackle is any debt you currently have. Mortgage, student loans, car payments…they don’t disappear in retirement.

And personal loan debt for baby boomers is 18% higher than the national average.

You’ll have to make sure there’s money for those payments—and more money if you want to pay them off early.

The last cost to be aware of is regular old inflation.

The beginning of 2022 has made the shifting value of money obvious.

We’re all feeling the extremely high rate of inflation, and retirees are extra sensitive to fluctuating money value.

But even in a more stable period of 20 years, prices rise, so if you take the same annual income your entire retirement, it won’t go as far in later years.

Don’t forget to build a “cost of living adjustment” (COLA) into your retirement.

So, are you ready?

Retirement is a big change, and there are many factors besides money to consider. Your health, your family, your personal goals…

Here are two final things to keep in mind when you make your decision.

Watch Your Fees

If you’ve been using an employee retirement plan, you might not have had any choice on how it was invested.

But once you reach a certain age, you have control over the plan.

A Pew study recently found that many retirees moving their 401(k)s to IRAs are getting hit with larger fees.

But the report focused on mutual funds. What if you have an account that is mostly institutional ETFs? What if you work with an advisor and still have access to a larger variety of funds, instead of trying to manage your own IRA? What other options are possible for you?

Not all 401(k)s are invested well, and not every IRA is created equal.

Find the right investments, fees, and risk appropriate for you. An advisor can help, and fiduciary advisors have new guidelines from the Department of Labor to make sure you’re receiving the best advice.

Make a Plan

Remember that there’s more than money to retirement. The financial calculator helps your planning, but don’t forget about the rest.

If you’ve been working all your life, what are you going to do in retirement?

It can be hard to adjust to your own hours. It can even be a little depressing to “start over” – even though retirement should be your golden years.

Think about what hobbies you’d like to focus on. Do you want a pet? Is it time for family?

Whatever you decide to do to make the most of your retirement, a financial advisor can help you explore your options and help you stay on track. And the sooner you talk to one, the sooner you’ll know how close you are to a safe retirement.

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