Americans Feel Ready for Retirement — But Do They Know These 6 Key Concepts?
American workers spend their entire professional lives saving for the day they can finally relax in retirement. Yet financial professionals say feeling ready for retirement and understanding how retirement actually works aren't always the same thing.
While many Americans know the basics, several key concepts can significantly influence how comfortably they retire.
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1. Retirement Spending Matters More Than Your Savings Balance
Many Americans measure retirement readiness by the size of their nest eggs. However, according to Jonathan Vance, a certified financial planner (CFP) and owner of Vance Financial Planning, LLC, understanding spending is “the single most important factor in retirement planning.”
He said it's particularly true when it comes to things like investments, planning for taxes and healthcare. Pre-retirees need to recognize that their current spending may look vastly different in retirement.
"Your pre-retirement lifestyle, your ideal lifestyle and the lifestyle that your personal retirement plan can support are almost definitely three different numbers,” Vance said.
2. Decumulation — Tapping Retirement Funds
Few workers understand how to spend their hard-earned savings once they stop working. Vance said this process is called "decumulation," and it’s easy for people to default to one of two extremes: “Either take as little as possible from your savings because you're naturally a saver, or take arguably too much from your savings without caution to how long you need the money to sustain you because you're naturally a spender.”
Like most things, he said, the best outcomes generally lie somewhere in the middle.
Pre-retirees also need to consider withdrawal strategies in ways that keep tax planning and other factors in mind, according to Daniel Gleich, a partner at Broad Financial and board member at Madison Trust Company.
“In reality, successful retirement planning typically involves understanding taxes, inflation, diversification and how different assets work together over decades,” he said.
3. Social Security Is More Than a Monthly Check
Most Americans know Social Security will likely play a role in their retirement income, but they often don't fully understand how claiming decisions, survivor benefits and future program changes can affect retirement outcomes.
"People tend to form emotional biases on choosing to delay versus choosing to take benefits early,” Vance said.
While nobody wants to think about the loss of a spouse, according to Kevin Tamlyn, a financial professional and founder of Next Stage Financial, understanding how survivor’s benefits work and planning for it are also important parts of “timing your benefit claim.”
Pre-retirees need to consider the projected Social Security funding shortfall due to hit in 2032, which, “per congressional guidelines, will translate into an immediate 22% benefit reduction unless additional financial support for the OASI Trust Fund is achieved,” said Tamlyn.
4. Inflation Doesn't Retire When You Do
Inflation is another important concept retirees need to understand as it relates to retirees' “current and future purchasing power," Tamlyn said.
Not only is inflation “a debilitating force upon retirees when it comes to attempting to sustain their desired living standards,” he added, it can also work against any bonds in a portfolio.
5. Diversification Means More Than Owning Stocks and Bonds
Many retirees understand the importance of investing, but experts say fewer understand how diversification should evolve during retirement.
Vance said that people either tend to gravitate towards “highly aggressive investment strategies or … too conservative of investment strategies” as they enter their withdrawal phase of life.
A better option is a middle ground of retaining long-term growth potential, hedging sequence of returns risk and staying flexible to make adjustments down the road as things change, he explained.
6. Healthcare Costs Are Part of Retirement
Healthcare is often treated as a separate issue from retirement planning, but the two are deeply connected, especially as it’s common for these expenses to be the single largest monthly household expense, Vance noted.
For anyone wanting to retire early, before Medicare age of 65, it's important to understand how significant marketplace health insurance premiums can be in early retirement, Vance said.
Long-term care events can add an additional $75,000 to $125,000 expense per year, Tamlyn said. And many couples will be faced with a 75% chance of one of them needing long-term care services and resources, he added.
Pre-retirees should be planning for these costs in their early 60s to avoid Income-Related Monthly Adjustment Amount (IRMAA) increases.
While no retirement plan is perfect, experts agree that a stronger grasp of these fundamentals can go a long way toward turning retirement readiness into retirement success.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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