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5 Hard-to-Believe Retirement Facts

By Ryan Downie - May 3, 2021 at 4:36AM

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Embrace these surprising facts so you can build a successful financial plan for retirement.

If you're worried that you won't have enough money to retire comfortably, you're not alone -- 70% of Americans share this concern. People know they need to save, but the specifics get hazy from there. How much should you have in your retirement account? How much do you need to save every year? How should you invest your 401(k)?

The answers to these questions are different for everyone, but accepting these five hard-to-believe retirement facts will help you build an informed plan that's tailored to your specific goals.

Retired man in peaceful meditation

Image source: Getty Images.

1. The average retirement number should be $650,000

Many people wonder how much they'll need to save to retire. There's no universal answer, leading to poor education on the topic. When you eventually stop working, cash flow from Social Security, pensions, or investments will cover your living expenses. Pensions are disappearing, so people are relying more heavily on their own investments.

Unfortunately, dipping into your savings is risky -- you can permanently exhaust your money by spending too aggressively. That's why financial planners developed the 4% rule. Historically, retirees could safely withdraw 4% of their retirement savings each year, while their investments produced dividends and interest. Low interest rates have caused many advisors to revise that rule to 3%, posing an even larger challenge to retirement planning.

The median retired couple has annual income of $57,000, $31,000 of which comes from Social Security. Investment income must cover the $26,000 gap. To stay within 4% rule guidelines, that necessitates between $650,000 and $860,000 in retirement savings (and that's just to maintain a median income, assuming no taxation). That number will also be higher for people retiring in the future, due to inflation.

Surveys show that most Americans think they'll only need around $300,000 to retire comfortably. Even more troubling: The average American over 65 only has about $200,000 in retirement assets. That's obviously not good enough. The math just doesn't add up. You need to save and invest early in your career to ensure that you'll be covered down the road.

2. The average couple needs $300,000 in assets to cover healthcare costs in retirement

Out-of-pocket medical expenses are different for everyone, but it's common to incur most of those costs in your older years. Medicare provides partial coverage, but you're still on the hook for a lot of those bills.

The $300,000 number, of course, an average estimate based on forecast expenses and growth rates. That said, a retired couple can reasonably expect to spend that much to meet all of their lifetime medical needs. We saw that most Americans believe they'll only need $300,000 to retire comfortably, so it's unlikely that most people have budgeted enough for doctor visits, prescriptions, and hospital stays.

3. Your savings become less valuable over time

Inflation is a major threat to your retirement plan. The U.S. dollar loses buying power over time, with a 3% average inflation rate. That figure has been closer to 2% for the past 20 years, but there are signs that we are entering a period of higher inflation as the economy recovers from the COVID-19 pandemic.

That's a problem for people living on a fixed budget. Are you planning to live on $100,000 per year when you hit age 65? That will spend as if it's $75,000 by the time you're 75, assuming 3% inflation. The value of your assets can drop fairly quickly, even if your account balance isn't falling.

Luckily, there are strategies to combat inflation. Retaining some exposure to stocks in your investment portfolio is one popular strategy because equity prices rise with inflation and tend to grow over time. In your fixed income portfolio, you can also consider using Treasury Inflation Protected Securities, whose value and interest payments adjust with inflation.

4. You don't get to keep all of your 401(k) savings

It can be scary to calculate the tax liability in your retirement account. The IRS allows people to defer taxes on contributions to qualified retirement accounts, such as 401(k)s, 457 plans, 403(b)s, and IRAs. That money gets invested and grows without any taxation.

The IRS will eventually get its pound of flesh, though. Distributions from these accounts are taxed as ordinary income. Today's average 65-year-old 401(k) holder has $216,000 in their account. Tax rates vary by state and change over time, but it's common for retirees to have effective income tax rates of 10% to 15%. It's realistic to expect the federal government to collect $30,000 from you over time. That number could be even larger if tax rates are higher in the future.

5. You need to plan for more than 20 years of retirement

Life spans are longer than ever, thanks to medical breakthroughs. For a married couple that reaches age 65, the average lifespan for the longer-lived partner is more than 20 years. It's common for at least one member of a retirement plan to spend 25 years traveling, dining out, and paying for healthcare.

A 25-year retirement plan was unfathomable decades ago when pensions were popular, and that's a big reason that pensions fell out of favor. Unfortunately, this means that individuals are left to their own devices. To combat the risks posed by longevity and inflation, retirees can:

  1. Make sure that they follow the 4% rule.
  2. Retain a balanced investment portfolio of stocks and bonds to provide growth early in retirement.
  3. Consider purchasing an annuity product that provides guaranteed income for the annuitant's lifetime.



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