If you're wringing your hands a bit about retirement, you're far from alone. Millions of baby boomers are staring down a number of fears as they prepare for their golden years. TransAmerica's 16th annual retirement survey found that of the top fears of workers nearing retirement, these three were the ones keeping people up most at night.
No. 3: Social Security's demise
Social Security has provided a financial safety net to retirees for decades and income received in monthly Social Security checks keeps millions of older Americans out of poverty.
According to the Social Security Administration, 53% of married couples and 74% of unmarried Americans count on Social Security for at least half of their retirement income. More frighteningly, nearly half of unmarried persons rely on Social Security checks for at least 90% of their retirement income.
Given those figures, it's not surprising that fear of Social Security's failure ranks among the top three fears facing tomorrow's retirees.
However, Social Security's future may not be as dim as some worry it might be. Although payroll taxes that fund Social Security have come up short to expenditures every year since 2010, the Trust Fund that's making up the difference between income and outgo isn't expected to run dry until 2029. Even when it does run out of money, the Congressional Budget Office estimates that the system can still support 70% of projected benefits in 2030.
That revelation may not be overly encouraging, but there's likely to be significant amount of political willpower brought to bear on Washington to rewrite legislation and save Social Security before we reach that point. Currently, 59 million Americans already receive Social Security and that number will climb significantly over the next fourteen years. Eager to curry the votes of those recipients, I would hazard a guess that politicians will find a solution.
Among the potential solutions they may consider are a hike in payroll taxes, an increase in the income limit to which payroll taxes are applied (it's currently $118,500), reductions in annual benefit increases, and an increase in full retirement age beyond age 67. Those may not be very palatable options, but they're more appealing than Social Security's failure.
No. 2: Declining health leading to long-term care
According to the U.S. Department of Health and Human Services, the average cost of a semi-private room in a nursing home is $6,235 per month. Assisted living facilities are less expensive, but still cost an average of $3,293 per month.
Those costs handily outstrip the average Social Security check and will erode most retiree's savings quickly, especially because long-term care isn't covered by typical health insurance programs, including Medicare. Although Medicare will pay for a short stay in skilled nursing facility following a hospitalization, it won't pick up the tab for most long-term care expenses, such as custodial care.
Medicaid offers seniors more help with long-term care expense, but only if those seniors are low income Americans with little in the way of assets. Additionally, if someone qualifies for Medicaid coverage for long term care, the patient pay amount that is associated with that care amounts to the lion's share of a retiree's income. All that's leftover is a small monthly stipend for their use.
That's a pretty grim picture, so it's not shocking that long-term care is weighing so heavily on the minds of many near-retirees. More than 40% of men and 50% of women age 65 are expected to live into their mid 80s, according to Vanguard, and that means that there's a good chance most Americans will have to pay long-term care expenses.
To minimize the likelihood of long-term care zapping retirement income, it may be worth considering long term care insurance. It's not cheap. But it can help protect income and savings in retirement. It may also be worth consulting with an elder law attorney to discuss options that may allow for the protection of a home or land. Sometimes, the establishment of a trust can provide a loophole. No, these solutions aren't ideal, but proper planning may at least make the threat of long-term care less scary.
No. 1: Outliving retirement savings
The median retirement savings of American workers totals $63,000 and given that most advisors recommend withdrawing no more than 4% of those savings per year in retirement, that nest egg isn't going to do a lot of heavy lifting when it comes to day-to-day living. More concerning is that nearly a quarter of Americans have saved less than $25,000 for retirement.
Even those Americans who have done better than most may still find that they haven't set enough money aside. About 22% of workers have stashed away more than $250,000, but even at that level, withdrawing 4% only translates into annual retirement income of $10,000.
In many cases, retirees are going to need to withdraw more than that magic 4% to make ends meet. But with every percent increase above 4%, risk increases that withdrawals will outpace returns, and deplete savings more quickly.
Fortunately, if you're in your 50s, there's still some time to salt away more money. If you're one of the many Americans that fail to max out their workplace retirement plan, it's time to take action. In 2016, up to $18,000 can be contributed to a 401(k) plan and an additional $6,000 can be set aside by people older than 50. Similarly, establishing a Roth IRA or traditional IRA can give savings a boost too. In 2016, up to $6,500 can be contributed to an IRA by Americans over age 50. Even if you can't max out those levels, adding a percent or two to a workplace retirement account can still make a big difference over time thanks to compounding interest, or the ability for interest to earn interest time and time again.
Fear in itself isn't bad if it's used to help motivate individuals to plan ahead. Putting your financial house in order prior to retirement may seem daunting, but preparation is key to designing the kind of financial blueprint necessary to allow you to live a financially secure retirement.