Put bluntly, America has a retirement problem. We lack the financial discipline to save enough for retirement, and we often aren't putting what we do save to work in the most efficient manner. The result is that tens of millions of Americans run the risk of lacking the money necessary to retire.
But this isn't just a concern of the working-class American. This is a concern for today's seniors and retirees.
Are seniors cheating themselves out of a comfortable retirement?
The Perspectives of Retirement survey conducted by PNC Financial Services Group found that more than half of all retired Americans fear running out of money. Nearly 3 in 5 were also drawing money out of their retirement savings on top of whatever income they were already receiving, such as Social Security, to meet their everyday living expenses. Seniors aren't in as good financial shape as they need to be, and they may only need to look in the mirror for the reason.
Four specific habits have seniors potentially leaving money on the table, which could wind up cheating them out of the retirement they deserve. In no particular order, here's how seniors are possibly sabotaging their financial futures.
1. Making poor Social Security claiming decisions
According to the Social Security Administration, Social Security income is only designed to replace about 40% of a worker's wages during retirement. But the December 2015 SSA fact sheet showed that 48% of married couples and 71% of unmarried persons get at least half of their monthly income from Social Security. The data suggest seniors are far more likely to be reliant on Social Security income to help them meet their monthly expenses, which makes the decision on when to file for benefits incredibly important. Unfortunately, seniors may not be making great decisions in this department.
Based on data aggregated by the Center for Retirement Research at Boston College using SSA filing information from 2013, around 45% of seniors sign up to receive benefits as soon as possible, at age 62. In total, about 60% claim benefits before reaching their full retirement age (FRA). FRA is a dynamic number that changes based on your birth year and determines when you're eligible to receive full benefits (i.e., 100%). For today's seniors it's either 66 years or 67 years. Claim Social Security before your FRA and you could take a benefit haircut of up to 25%-30%, which is what 3 in 5 seniors are currently doing.
However, wait until after your FRA and you could earn above and beyond 100%. This is because benefits grow at roughly 8% per year for each year you wait to claim, up to age 70. Just 10% of all seniors are currently filing for benefits after their FRA; but if you wait, your monthly payment could be significantly higher.
Waiting isn't going to be for everyone, but a few types of seniors really benefit. Seniors in good or excellent health who could live long lives are one such group. Also, seniors with very little to nothing in retirement savings would be wise to wait. Since Social Security income will be their only source of retirement income, working longer and waiting to receive a bigger payment is the prudent move.
2. Not having a withdrawal plan in place
Another dangerous move that seniors have made is "winging it" when it comes to withdrawing their retirement savings. According to a 2014 survey from T. Rowe Price of people who'd retired within the past five years, 52% had no formal plan for withdrawing from savings. The reason this is such a concern is simple: if seniors aren't thinking about the tax implications of their withdrawals, they could wind up kissing a significant chunk of their hard-earned investments goodbye.
A withdrawal plan should be created years in advance of retirement -- but if you're already retired and still don't have one, get started now. Having a retirement budget firmly in place years in advance, and adjusting your spending up or down to meet that budget over time, will help you avoid the sudden income shock of no longer receiving working wages. More importantly, it'll keep your spending and withdrawal patterns on target so you don't pay any more taxes to Uncle Sam than you have to.
An additional consideration to make concerns the tax implications of the state you plan to retire. There are 13 states that tax Social Security benefits, which means retiring in these states could mean keeping less of your retired worker benefits. Likewise, retiring in a state with high property taxes, such as New Jersey, where the average property tax is 2.29% per home according to WalletHub, versus a state with low property taxes, like Delaware, with a state average of just 0.53%, can lead to a big money difference over time.
3. Not taking advantage of the catch-up contribution
An easy way to derail a comfortable retirement is to pass up the opportunity to better your own financial situation. This appears to be exactly what plenty of seniors are doing by failing to take advantage of the catch-up contribution with tax-advantaged retirement plans.
Tax-advantaged retirement plans, such as employer-sponsored 401(k)s, Traditional IRAs, and Roth IRAs, allow workers -- meaning John and Jane Q. Public -- to contribute a very specific amount each year. In 2016, workers aged 49 and under could contribute up to $18,000 to their 401(k)s, while same-age individuals could contribute up to $5,500 to Traditional IRAs and Roth IRAs.
However, these tax-advantaged plans have a nice clause added in for seniors aged 50 and up: the ability to add extra money, which is known as the catch-up clause. Seniors aged 50 and up can contribute up to $24,000 annually to an employer-sponsored 401(k), a $6,000 boost compared to workers aged 49 and under. For Traditional and Roth IRAs, seniors are allowed an extra $1,000 contribution, pushing their annual limit to $6,500. Yet, according to FundReference.com, just 14% of eligible households made their full contributions to IRAs, including the catch-up, in 2013. Another 10% made contributions, but didn't take advantage of the catch-up, while 71% made no contributions to IRAs at all.
Tax-advantaged funds can be instrumental in allowing seniors to grow their nest eggs and/or keep more of their money once they retire. Ignoring these catch-up contributions is almost always a bad idea.
4. Investing too conservatively
The final way seniors could be cheating themselves out of a comfortable retirement is by investing far too conservatively, even during retirement.
For many baby boomers and current retirees, the tumble the stock market took during the Great Recession is still fresh. Because of the occasional volatility experienced by stocks, seniors may be avoiding the stock market altogether, choosing to instead put their money in safe and secure U.S. Treasury bonds or the bank. But here's the problem: quite a few alternative asset classes aren't producing enough of a return to outpace the rate of inflation. Even though seniors could be earning nominal income with a bank CD or T-bond yielding 1%, they might be losing real money (i.e., purchasing power) to inflation.
This isn't to say that seniors can't put at least some of their income in various types of fixed-income assets. However, seniors need to be careful not to become too conservative with their investment strategy. While the amount will vary based on each individuals' needs and risk tolerance, seniors should consider staying invested in the stock market for an extended period of time. With retirees hanging up their work gloves for perhaps two decades or longer, chances are they'll have plenty of opportunity to see their money go to work.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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