In addition to knowing the best investments to make when heading into retirement, it’s also important to know the obstacles retirees face, so you can take steps now to avoid them.
We put together five of the biggest retirement obstacles that can rob unsuspecting retirees of their hard-earned money.
Don’t let your retirement savings get eaten by government intervention or tax consequences. Check out our list to be “in the know” about retiring in 2017.
Obstacles Retirees Face in 2017 No. 5: Not Saving Enough Money
An April 2015 survey done by the Employee Benefits Research Institute found more than one in 10 workers think they’ll need to save at least $1.5 million to retire comfortably.
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That’s up from $1 million, which used to be the industry standard for retirement savings 10 to 12 years ago, according to USA Today. Additionally, David Weliver, founder of the finance website Money Under 30, said using the $1 million rule of thumb could leave adults short on cash in their retirement years.
A big reason for this is longer lifespans.
According to the Social Security Administration, the average 65-year-old man is expected to live until 84, and the average 65-year-old woman is expected to live to 87. Compare that to 1995, when the average life expectancy for a male was 72.5, and for a female was 78.9.
The trend of living longer has caused certified financial planners, like Elizabeth Grahsl, to recommend her clients save enough retirement money to cover 25 years of expenses. In order to do so, resources like Fidelity suggest workers aim to save at least eight times their ending salary by retirement.
Based on last year’s median household income, that means pre-retirees should have $429,000 in savings by age 60. But according to a BlackRock survey, the average baby boomer has only $136,200 saved for retirement.
Even worse, 55% of adults over 55 claimed to have no retirement savings, according to a GoBankingRates study.
Obstacles Retirees Face in 2017 No. 4: Increased Healthcare Costs
A study done by JAMA Internal Medicine revealed that healthcare costs are expected to increase, going from $190,000 for retirees in 2005 to $245,000 for those retiring today.
A 65-year-old couple retiring in 2016 was expected to spend an average of $260,000 on medical expenses over the next 20 years. That’s excluding the cost of any additional long-term care, according to Fidelity.
And the worst part is retirees aren’t planning for these increasing healthcare costs. According to a survey done by Nationwide Retirement Institute, 48% of retirees or near retirees said they don’t speak to their financial advisor about the costs [of medical care] because “it’s a personal issue.”
Additionally, more than half of the participants said they were “very or somewhat concerned” that increased medical expenses would deplete the assets they had hoped to leave their children.
Obstacles Retirees Face in 2017 No. 3: Social Security Is Running Out
By the time some of the last baby boomers reach retirement, Social Security could be gone.
According to the Social Security Administration’s 2015 report, “asset reserves would…begin to decline in 2020, and become depleted and unable to pay scheduled benefits in full on a timely basis in 2034.”
The same report says that “at the time of depletion…trust funds would be sufficient to pay 79 percent of scheduled benefits.”
And at the moment, there is no clear path to fixing Social Security. As each new proposal is rolled out, critics focus on the drawbacks and respond with fierce backlash.
The pushback is mostly focused on the fact that these proposals will increase taxes and cut benefits, because according to the Social Security Administration, in order to keep Social Security solvent through 2087, benefits would have to be cut by 21%. Meaning that the 75 million baby boomers who plan on retiring will be starting out with 21% less money than they planned for.
Obstacles Retirees Face in 2017 No. 2: Rolling Over Your 401(k)
Additionally, retirees have to consider what to do with their employer-sponsored 401(k). At first glance, the decision may seem pretty simple; that is, to just leave the money in the 401(k). After all, it is protected from creditors and bankruptcy.
But by leaving your money in the 401(k), there are a few things you are limiting yourself to:
- You’re restricting the diversity of your portfolio to only those funds offered by the plan.
- Some (but not all) employer-sponsored plans have higher fees than IRAs.
- If you no longer work at the company sponsoring the plan, you may not be kept up-to-date on any changes the employer has made to your 401(k), therefore limiting your knowledge of your investments.
On the other hand, if you decide to roll over your employer-sponsored 401(k) to an IRA, that money will get the same tax treatment as it would in a 401(k). Plus it gives you the ability to invest in almost any stock, bond, or mutual fund you want, giving you more control and less restriction when investing. And you will be able to save money by cutting down on fees associated with the plan.
Obstacles Retirees Face in 2017 No. 1: The DOL Fiduciary Rule
Starting on April 10, 2017, the Department of Labor is going to roll out its new fiduciary rule. It requires financial advisors who handle retirement accounts to “act in their client’s best interest.”
Its goal is to simply remove the habit of some brokers to recommend funds that benefit their firm, and instead focus on what best meets their clients’ goals. But the way the rule is set up could actually end up harming retirees. It will raise operating costs for the firms, which could trigger higher fees associated with retirement investment accounts.
For example, on Aug. 1, 2016, Principal Financial Group said for wealth-management firms to fully comply with the new fiduciary rule, each institution will be looking at additional costs ranging from an “estimated $1 million a month for the next 18 to 24 months and between $5 and $10 million a year afterwards.”
And that bill is unlikely to be fronted by the firms without a little help from you, because the fiduciary rule’s cost to investors “would be over $5.6 billion a year,” according to Economist Incorporated. This is partly due to “wrap fees,” where brokers charge clients based on a percentage of assets.
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