Retirement was once a subject of fond anticipation. All too often these days it's a topic of dread. Who, after all, can afford to retire?
The whole concept has changed in recent years. At one time, a retiree hung it up around age 65 and began drawing Social Security and maybe a pension. If they had a low cost of living, they could do nicely. Weekly golf games, parties with friends and maybe a trip or two each year.
Somewhere along the way our idea of retirement became a bit more ambitious: a vacation home in Florida or maybe the purchase of a New England bed & breakfast or a California vineyard as a retirement business.
Some might have adequately saved and invested for such a life of leisure but most of us didn't. According to a survey by ING, the national average for retirement savings is 2.42 times your annual income. People in New Mexico saved the most, at 4.56 times their income.
Then along came the Great Recession of 2008. That seemed to change the landscape for a lot of people nearing retirement age.
“I believe this downturn hit baby boomers the worst,” said Michelle Perry Higgins, a principal at California Financial Advisors, in San Ramon, Calif. “Many people at or nearing retirement age were forced back to work or had their retirement dates pushed out. Some even began tapping into their retirement funds early to make ends meet. They simply never imagined that home value and stock market losses could be so severe. I also believe that many investors have had to reassess their risk level and determine what they could tolerate in this new economy.”
They've also had to recalibrate their savings goals. But how much savings is enough? A number of websites have devised retirement savings calculators, to help answer that question.
Last November the Center for Retirement Research at Boston College issued a report finding that over half of U.S. households may be unable to maintain their present standard of living in retirement. The hardest-hit were those nearing retirement and those with the highest incomes.
Rising medical costs
A 2012 study by Fidelity Investments found a 65-year-old couple retiring last year was estimated to need $240,000 just to cover medical expenses throughout retirement. That was a four percent increase from the previous year, when the estimate was $230,000.
“Today’s workers must understand that the cost of health care is expected to continue rising significantly in future years,” said Brad Kimler, executive vice president of Fidelity’s Benefits Consulting business. “Medical inflation is outpacing salary increases and cost-of-living adjustments for many people. Until that situation changes, it is critical that individuals include health care costs in their retirement savings strategies today so they can be prepared to pay their medical bills throughout retirement.”
Social Security won't get you very far but surprisingly, many retirees rely on Social Security benefits as their primary source of income. For a 65-year-old couple retiring in 2012 on a $75,000 annual household income, Fidelity estimates their annual Social Security payments will be about $29,970.
In another report, the Employee Benefit Research Institute found 60% of workers report total savings and investments, excluding home value and pension, are less than $25,000. It found 56% of workers have not even attempted to determine how much they need in retirement savings.
Sense of urgency
“The people I see that have a heightened sense of urgency about retirement are those that were actively planning for retirement pre-recession,” Higgins said. “They were caught off guard like everyone else, but they made corrections more quickly. During the financial crisis they were on top of their finances, adjusting living expenses, reviewing their portfolios and evaluating risk. These folks understand how the meltdown changed their financial plan, and are making moves necessary to keep themselves on track.”
Making matters worse for many people approaching retirement age is debt. It's a huge drain on resources at a time you need to be putting money away for the future. Credit card debt, car loans and even student loans are proving to be a financial drag for some baby boomers. If there's one message Higgins would like to deliver it's this: stop procrastinating.
“I believe there are many Americans that are not adequately prepared for retirement and the reality of this terrifies them,” she said. “I urge those people to take their heads out of the sand and start the planning process now. The recession didn’t discriminate against race or class; it affected everyone, so we all need to take some type of action. A retirement recovery plan will take a bit of effort, but it doesn’t have to be done alone. There are plenty of well qualified financial advisors that can help.”
Getting a handle on expenses
To get serious about retirement, Higgins says you need to get a handle on your expenses. If you've never tracked your expenses, start now – looking for places to cut. In addition, she says there are five questions you need to answer to get on the road to a secure retirement:
- Would I be willing to downsize my home or move out of the area?
- Am I willing to reduce my standard of living, if need be?
- Can I continue to work for several more years if my financial plan requires it?
- What is my model for retirement and is it a priority to me?
- Have I been honest with my financial planner so they can help me achieve my goals?