Many people have not saved enough money for retirement. The statistics are staggering. 48% of households with older members do not have any defined contribution plans such as IRAs or 401(k)s. Some of these people are expecting to live on their small pensions or Social Security.
76% of all people in the United States are worried that they may not be able to retire securely. Social Security alone means that retired adults are living at the poverty level.
Setting yourself up for retirement security means starting to save as early as 21 years of age. If you contribute the maximum to a Roth IRA between the ages of 22 and 65, (at a 5% compounded rate of return) you will have more than $1.6 million at retirement. Many people have waited too long to take advantage of the benefits of compound interest and long-term returns. For these workers, it is crucial to start a robust savings plan as soon as possible.
William Bitters, president of United Financial Information Services (UFIS) wants people need to understand that what they thought would be enough money to retire on, may not take them all the way through their golden years. Due to medical advances, people are living longer, and those that get to an advanced age become fearful of outliving their money.
How Much Money Do You Need to Retire?
In years past, financial planners recommended that retirement income should equal 75% of their pre-retirement income. In the past few years, some financial experts have changed their recommendations from 75% to 135% based on a study from Duke University. This increase caused a great deal of alarm in the retirement community since most workers’ savings plans were not set up originally to provide this level of income and people wondered if and how they could make up the difference.
For example, a couple earning $100,000 per year before retirement should plan on a $135,000 income during retirement. $75,000 is not enough to continue their previous lifestyle.
Withdrawals from Roth IRA and 401(k) products are exempt from income tax. This can help working adults accumulate tax-free savings in the long term. These retirement products need to be balanced with other possible tax-free retirement products to try and make up the difference between the 75% to the now recommended 135% pre-retirement income.
Reasons for the Rise in Replacement Income
People should take into consideration the fact that life expectancies are on the rise, particularly for women. Planning for only ten years of retirement income is generally not enough. People should plan at least twenty years of retirement income, taking them from age 65 to age 85 at a minimum.
People who believe that they may need long-term care when they are seniors, due to physical limitations or family risk of inherited diseases such as Alzheimer’s, will need to plan for more health care dollars. While it is true that Medicaid covers long-term care in many cases, what people need to understand is individual assets will need to be used up and wiped out before they are eligible for Medicaid.
People also need to make sure that they are budgeting enough money for medical copays, even if they are on Medicare. While Part A is covered by the government, many people will secure supplement plans for vision, dental, and prescriptions that will incur a 20% copay.
The cost of living is also on the rise. Housing, food, utilities, insurance and other considerations will all increase compared to their current costs to be.
Save More for Retirement
In summary, it is necessary to plan for a higher standard of living now, more than the previous traditional 75% of pre-retirement income. An option for some people may be to delay retirement until the age of 70 while continuing to make contributions to savings accounts. However, it is useful to develop a relationship with an advisor such as William Bitters to assist you in discovering the options that work best for you given your lifestyle and circumstances.
