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5 Surprising Retirement Facts You Probably Didn’t Know

5 Surprising Retirement Facts You Probably Didn’t Know

October 21, 2021
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If by any chance you’re worried that your retirement funds won’t comfortably cover the entire period, you’re probably right –and you’re not alone. About 70% of Americans are concerned that their savings and retirement plans will dry up along the way.

While you know that you need to save and have a retirement account/plan in place, it might not be clear to you yet how much you should save or where you should invest.

Well, we may not have the exact answers for you, however, sharing the below hard-to-believe facts about retirement should shed some light on how to customize your retirement plan based on your long-term goals.

So here we go.

1. Retirement Could Last Longer than You Think

Generally, Americans are living longer, and this is partly due to improved healthcare. Typical married couples who reach the retirement age of 66 end up living for 20 more years. At least one partner may spend over 20 years paying for healthcare, dining out, and exploring the world.

Two decades ago, you couldn’t imagine a 25-year retirement plan, mainly because the lifespan was shorter then. Pensions were popular and more relevant than now, which explains why they’re slowly disappearing. This development means you need to find ways to mitigate the risk by, for instance, following the 4% rule, purchasing annuity products, or investing in stocks and bonds.

2. You Need About $650,000 On Average for You to Retire Comfortably

As mentioned earlier, many Americans are not sure how much they should save for their retirement. As you may imagine, the answer to this question varies from one person to another. Generally, the idea is when you stop working, your pension, social security, and/or investments will cover your expenses.

Considering that pensions are becoming unreliable every year, you may want to think about other forms of investments. But when it comes to savings, don’t spend it aggressively, observe the 4% rule. Well, previous retirees could safely withdraw 4% of their savings annually, and this could be easily covered by interest and dividends they earned.

Today, however, low interest rates and rising inflation means that you need to reconsider this rule, and indeed many financial planning experts recommend revising the 4% rule to 3%.

An average retired American couple earns about $57,000 annually, and $31,000 this comes from Social Security. This means the remaining gap of $26,000 must come from investment. So, if you want to be able to withdraw 4% yearly, you need about $650,000 - $860,000 in retirement savings, excluding taxes. Due to inflation, chances are this number will be higher in the future.

Studies reveal that an average American grossly underestimates what they will need to retire comfortably, placing this number at around $300,000. Even worst, the median number of Americans has only about $200,000 in retirement assets. This is obviously too little, which is why you need to start saving much earlier in your career.

3. Your Retirement Savings Will Lose Some Value Over Time. 

As you save for retirement, inflation will be one of the major threats to your plans. The average inflation rate in the U.S. is about 3%, but this had improved, nearing 2% in the last two decades. As the economy recovers from the pandemic, the chances of inflation will increase again.

If you’re living on a fixed budget, this will highly affect you. For instance, if you plan to live on a budget of $200,000 per year by the age of 65, the actual value of your money will be about $150,000, considering a 3% inflation. The value of your account balance and your assets can drop a lot faster, even if your account balance is not reducing.

If you’re in this fixed asset and budget situation, you can change things by utilizing certain strategies. For instance, you can retain some exposure to stocks in your investment portfolio because equity prices tend to grow with a little patience, and they rise with inflation. Alternatively, you can try out Treasury Inflation-Protected Securities in your fixed-income portfolio because their value and interest pay-outs are adjusted to reflect inflation.

4. An Average Couple Will Need About $300,000 To Cover Retirement Healthcare Costs

During your older years, you will experience more out-of-pocket medical expenses than you can imagine. Most health insurance policies, including Medicare, offers partial coverage, so you will still need to fill in the gaps, and this will be different for everyone.

So, you would need about $300,000 on average as a retired couple to cover medical bills. But, of course, this is just an estimate based on growth rates and forecasts on expenses. Nonetheless, with $300,000, you will be able to comfortably cover all your medical expenses as a retired couple. This means for most Americans who have budgeted $300,000 for their entire retirement, they have only actually budgeted for retirement healthcare.

5. You Won’t Keep All Your 401(k)

Trying to calculate the tax liability for your retirement account can be a little intimidating. Luckily, the IRS allows you to defer tax contributions if you have a qualifying account –this includes 401(k)s, 403(b)s, 457 plans, and IRAs. This money gets invested for further growth; however, the IRS will still eventually come for their share.

The above-named accounts are taxed just like ordinary income. An average 65-year-old 401(k) holder today has about $216,000 in their account. The taxation rates will vary depending on the state, and will also vary from time to time, but you can expect a taxation rate of 10% to 15%. At this rate, you can expect the IRS to collect about $30,000 over time from you.

The Bottom Line 

The slow erosion of pension plans means Americans should turn to defined contribution plans to prepare for retirement. But as we have seen from the above, most Americans are not prepared for this adjustment.

Generally, the above 5 facts should trigger you to re-look at your retirement plan, savings, and investment options so that you’re better prepared for any unfavorable changes.