A disturbing number of baby boomers are ill-prepared for retirement. Nearly one-third have no money saved in retirement plans, according to a recent study by the Stanford Center on Longevity.
Even many of those with savings haven’t accumulated enough for a lengthy retirement; the median savings amount for boomers in the report was approximately $200,000, and experts say a nest egg in the neighborhood of $1 million is needed to support a 30-year retirement.
Most millennials are on a similar path; research by the National Institute on Retirement Security finds 66 percent of those working have nothing saved for retirement.
It’s well documented that insufficient retirement funds can have severe consequences. Carrying excessive debt into retirement – on average, baby boomers have over $110,000 in debt – and possibly facing higher health-care bills as they age are two factors that add concern for ill-prepared retirees.
With both older and younger generations heading toward an uncertain retirement, it’s important for them to become better educated about some key pillars and costs of retirement and how to plan more effectively:
Medicare. Understanding Medicare in retirement is extremely important, because what sounds like a good deal may not always be such. For instance, Medicare Advantage Plans typically offer health-care plans for seniors with a zero monthly premium. Many people think that’s a good deal, but they still will have deductibles, copayments and prescription-drug costs that they will have to pay out of pocket.
Solution: Purchase a Medicare supplemental policy, which varies in cost depending on your state but is generally affordable. That covers 100 percent of part A and B deductibles. It’s smarter to pay more up front than to cover major expenditures on the back end, especially for those who haven’t saved enough.
Taxes. Unfortunately, some people who have saved enough for retirement have been told they will be in a lower tax bracket in retirement, when in reality that’s often not true. Let’s say a married couple gets two Social Security checks and other sources of income. These are all taxable. And if your income is over $32,000, basically 50 percent of your Social Security is taxable.
A problem lies, too, in the type of account that was used to save for retirement. In many cases, the money is probably in a 401(k) or an IRA. You’re required to take distributions from those accounts at age 70½, and once you take a required distribution, your income increases and it may push you into a higher tax bracket. This is a major problem for widows and widowers.
Solution: Have a conversion strategy to transfer those assets into a Roth IRA while both spouses are still alive. That way you’ll have less forced taxable income for the surviving spouse, and more tax-free dollars passing on to the next generation.
Long-term care. Fidelity recently published a study that estimated the average couple will need $280,000 in today’s dollars for medical expenses in retirement - excluding long-term care, like going into a facility or receiving home health-care delivery.
Solutions: If you’ve waited too long to purchase long-term care insurance, you might balk at the price, but you can justify it in the long run. If you’ve already bought it or are thinking about it, a poker analogy is helpful. Once you start playing a game of poker, I like to say you are “pot-committed.” Likewise, once you start paying those long-term premiums you should never stop, because you will eventually get all your money back in a lump sum once you start using the policy. Another option is a hybrid life insurance policy. With this you can access tax-free part of your death benefit prior to death to cover long-term expenses.
David Brooks Sr. is an Investment Adviser Representative (IAR) and the founder-president of Retire SMART. He has invested 20 years in the industry, has passed the Series 63, 65 and 66 securities exams and holds life and health insurance licenses in Iowa, Nebraska and South Carolina. Brooks has earned the Certified Income Specialist (CIS) and Certified Healthcare Reform Specialist (CHRS) designations. He has been published and quoted in The Wall Street Journal and Forbes and hosts a weekly radio program, Retire SMART with David Brooks, on Omaha’s 1420 AM/FM 94.5 The Answer.
© 2021 Newsmax Finance. All rights reserved.