Yahoo Finance 4 Financial Fears About Retirement, And How to Overcome Them
Saving for retirement is inevitably a guessing game. No one knows how long they will live or how healthy they will stay, which means no one knows just how much to save.
Because of all these future unknowns, it's not uncommon to develop a healthy -- for the most part -- fear about retirement. Whether it's fear that the money won't last, that Social Security won't be there or that one's health will deteriorate, concerns can drive savers into unnecessary or unsafe investment vehicles.
On the other hand, fear can also lead to avoiding risk altogether.
"You might have someone come in, totally risk averse," says Greg Stevens, a financial planner at Cabot Wealth Management in Salem, Massachusetts. "It's just as detrimental as being too aggressive," since one's savings will struggle to grow large enough without enough equity exposure.
[See: 7 Tips for Finding the Best Target-Date Retirement Funds to Buy.]
Understanding where the fear comes from and how to attack it, can put savers at ease. Here are some of America's biggest retirement fears and how to avoid them.
Running out of money. In a recent survey by the financial services company Transamerica Corp., 51 percent of respondents said their greatest retirement fear was outliving their savings -- an increase from 44 in the previous year.
Stevens recalls advising a couple who had a a large nest egg and were ready for a comfortable retirement. But shortly after retiring, the couple decided to fund an extravagant wedding for one child, provide a down payment on a house for another and gifted a large present to a third. Their comfortable retirement had become less certain.
"There was not a whole lot of wiggle room," Stevens says. "It's a perfect example of a client seeing numbers they've never seen before [and] don't necessarily stick with the budget and plan."
Deciding on how much to withdraw from the savings accounts will be a determination that every retiree must consider, in order to ensure funds last.
Joseph Anderson, president of Pure Financial Advisors in San Diego, helps his clients' figure out how much money they'll have by first determining how much fixed income to expect.
For example, a hypothetical investor has $100,000 in a 401(k) receives $20,000 annually from Social Security, plus another $10,000 from a pension. If they takes 4 percent out of the 401(k) each year, they'll have an annual budget of $34,000.
[See: 9 Growth Funds That Will Turbocharge Your Portfolio.]
"If you can [live on that], then it's a very high probability you're not going to run out of the money," Anderson says.
The 4 percent rule is the common withdrawal rate that usually lasts through retirement. While research shows the 4 percent rule doesn't always work, it's a good gauge to see where one stands.
Social Security cuts. The fate of Social Security is a common concern Anderson hears, and one that there's not much clarity on. By 2035, taxes will cover only 75 percent of the planned benefits, according to the Office of Retirement and Disability Policy.
Possible solutions are to raise taxes or to increase the retirement age of 67 for those born after 1960. Either way, savers will be affected. Anderson doesn't worry about the issue for those retiring in the next few years, since any changes will likely protect those near the age of claiming rights.
But for the younger set, it's a consideration since the amount of Social Security one can expect in retirement may be deflated from today's mark. That generation will have to save more themselves.
Rising health costs. Such a large part of retirement savings is ensuring there's money to take care of us when we no longer can take care of ourselves. And it's no surprise that health remains a top concern, with 45 percent of those surveyed fearful of declining health that would lead to long-term care and 35 percent most worried about cognitive decline.
This concern has fueled the growth of long-term care insurance, which has jumped from a $30 billion market in 1980 to $225 billion now, according to a report by the National Association of Insurance Commissioners. But premiums have risen with the increased demand; last year, the federal government announced an average 83 percent increase in long-term care premiums for employees, as an example.
"Premiums on long-term care insurance have gotten high and coverage isn't as broad," says Stevens, so he finds more of his clients are self-funding the long-term care costs. This means they must guarantee their money will last through retirement, by either saving more or pulling out less percentage of funds each year.
Forced retirement. Nearly 20 percent of people fear that they will be forced into early retirement, according to Transamerica's survey. This actually isn't high enough of a rate, since the Employee Benefit Research Institute has found 46 percent of workers leave earlier than planned, due in large part to health concerns or layoffs.
"If that doesn't make people to look and start planning today, I don't know what does," says Anderson.
To prepare for this, maximize your 401(k) contribution. If you are older than 50, then the limit to contribute to the 401(k) jumps to $24,000 a year, up from the typical $18,000 ceiling. Plus, it ensures the saver takes advantage of any company match.
But even then, jumping out of the workforce unexpectedly at the age of 60 can quickly diminish savings accounts, if stuck withdrawing from a 401(k) early. To avoid this, determine the yearly expectations for when in retirement. Even if finding a full-time job isn't in the cards, having part-time work that covers the amount will allow a saver to avoid tapping the retirement accounts until they're needed, Anderson says.
[See: 12 Tips for Investors in Their 50s and 60s.]
And, who knows, maybe a second act will be discovered in the process, which would turn a scary situation into a fantastic future.
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