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15 Harsh Truths Retirees Need to Know

By Christy Bieber - Aug 18, 2022 at 7:00AM
Hand holds pen near jar of coins labeled Retirement.

15 Harsh Truths Retirees Need to Know

Unrealistic retirement plans can doom you to financial insecurity

Retirement should be one of the best times of your life, but that's possible only if you have a plan to support yourself in comfort. Unfortunately, many people have misconceptions about what their income sources will be in retirement -- and this can be dangerous.

If you want to make sure you're prepared to support yourself in your senior years, it's important to be aware of these 15 harsh truths about retirement.

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A Social Security card.

1. Social Security benefits won't provide a sufficient amount of income

Many people assume Social Security will provide them with most or all of the money they're going to need in retirement. But that's not going to happen. Benefits replace 40% of pre-retirement income, and replacing around 80% is about the minimum needed.

You don't want to overestimate what Social Security can do for you, so be realistic about what your benefits will cover and make sure you have plenty of supplementary income from savings.

ALSO READ: 3 Reasons Social Security Alone Isn't Enough for Retirement

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Office workers surround retiree at retirement party.

2. You may be forced to retire sooner than planned

Many people plan to work late into their 60s in order to have more time to save and less time to rely on their savings. Sadly, this isn't always possible because you may become physically unable to work or job opportunities could dry up.

It's important to plan for an early retirement when setting savings goals. And if you are already nearing retirement and find yourself forced to stop working before you wanted to, you'll need to make lifestyle adjustments quickly to preserve whatever funds you have saved.

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Person handing you a large paper check.

3. An early Social Security claim can permanently shrink your benefits

Social Security benefits first become available at 62. Many people hope to claim them ASAP without realizing the impact this can have on their income. Others know that an early Social Security claim can reduce their benefits, but assume that their checks are recalculated later. That's simply not true.

The reality is every senior has a full retirement age (FRA) based on birth year, and starting benefits any time before it will shrink them permanently. The reduction can be quite substantial, as someone with an FRA of 67 who starts payments at 62 will see a 30% reduction to the standard benefit.

ALSO READ: How Much Will Your Social Security Benefit Shrink by Claiming Early?

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Casket being carried by people in suits.

4. Early claiming also affects survivors benefits

If you claim your Social Security checks early, it's not just your own financial security you are going to impact. If you were the higher earner, your spouse's survivors benefits could be smaller.

The last surviving spouse gets to keep the higher of the two checks coming into the household. If your Social Security income is smaller because you started payments early, this means less money for your widow(er).

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Person wearing an apron in a supermarket smiles.

5. Working while receiving benefits could mean temporarily forfeiting Social Security checks

If you haven't reached full retirement age yet and you want to work while collecting Social Security, you could find yourself forfeiting some of your benefits.

You lose $1 in retirement checks for every $2 earned above $19,560 if you won't hit FRA at all during the year. And if you'll hit FRA some time later, you lose $1 in benefits for every $3 earned above $51,960.

At full retirement age, your check amount is recalculated to adjust for forgone benefits. But this still means you can't easily double-dip and get a paycheck and Social Security earlier.

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6. Your Social Security benefits could be taxable

Many retirees are very surprised to discover that Social Security benefits can be taxed.

You could owe federal taxes if you are a single tax filer with a countable income above $25,000 or if you are a joint tax filer with a countable income above $32,000. Countable income is half your Social Security checks, some nontaxable income such as municipal bond interest, and all taxable income.

ALSO READ: Will You Be Taxed on Your Social Security Income? Here's How to Find Out.

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Rising and falling line chart with the word Inflation superimposed over numbers that include percentages, dates, and decimals.

7. Social Security benefits aren't keeping pace with inflation

Social Security beneficiaries get periodic cost-of-living adjustments (COLAs) to help ensure their benefits don't lose buying power as prices arise.

Unfortunately, research from the Senior Citizens League shows COLAs aren't doing a good job helping to ensure seniors don't lose ground. In fact, benefits have lost 40% of their buying power since 2000.

Retirees need to be aware of this reality and understand their benefits are going to buy less as they age so they'll need to rely more on savings.

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A hand is drawing a graph on a blackboard of an upward trending arrow, over a series of progressively bigger dollar signs.

8. Big Social Security raises are bad news

In 2022, Social Security retirees got a huge raise, and they're on track for another one in 2023. While seniors may get excited to hear they're going to get much more money in their monthly payments, the reality is a big COLA is bad news.

COLAs are calculated based on how much a consumer price index shows costs have gone up year over year. That means if there's a large COLA, it's because prices have gone up a lot. Since seniors also need to rely on savings, it's not good for them when inflation is high, as their money won't go as far.

ALSO READ: There's Some Bad News About 2022's Big Social Security Raise

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Medicare written on a Post-it note on a pile of hundred dollar bills.

9. Medicare premiums can reduce your Social Security checks

Retirees generally have Medicare premiums taken out of their Social Security checks. This reduces the amount of monthly income your benefits provide.

Medicare premiums also go up in most years, so even if you get a COLA, some of that raise will disappear as you pay higher insurance costs.

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Doctor speaking with patient.

10. Medicare isn't going to cover all your healthcare costs

Many retirees assume they won't need money for healthcare once they are covered by Medicare. But that's not the case.

There are premiums and coinsurance costs in the Medicare program. And there are lots of coverage exclusions, so most people end up buying a supplementary Medigap policy or switching to a more comprehensive -- and more expensive -- Medicare Advantage plan.

The amount that seniors can expect to spend is shocking, as a recent Fidelity study found the average 65-year-old couple could expect to pay an average of $315,000 out of pocket.

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11. Many retirees end up needing long-term care services

According to research from the Urban Institute, 70% of adults ages 65 and over are going to need long-term care at some point during the rest of their lives.

Nursing home or home care can cost tens of thousands of dollars per year, and many retirees have no plan at all for covering these huge costs. This can lead to draining your nest egg and being unable to leave a legacy for loved ones.

ALSO READ: Is Buying Long-Term Care Insurance Worth It?

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A nursing assistant holds a person's hand.

12. Long-term care isn't covered by Medicare

Another common misconception retirees harbor is that Medicare will cover long-term care. This is not the case in almost all circumstances. Medicare does not cover custodial care, which is the kind of routine nursing care most people need. In fact, it pays nothing at all for these services.

While Medicaid will provide nursing home care coverage, you must spend down your assets before you become eligible for it.

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Two people looking shocked at a receipt.

13. Inflation will reduce the buying power of your savings

When you have a large nest egg, such as $1 million saved, this may seem like a huge number. But it's important to remember that inflation is going to eat away at the value of your savings over time.

Be sure to take into account the natural increase in prices when you determine if your savings is likely to go far enough to support you.

ALSO READ: Worried Inflation Will Wreck Your Retirement? Here's What to Do

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Green four percent sign.

14. The 4% rule may leave you running short of money

For a long time, experts advised retirees to follow the 4% rule. This meant seniors could withdraw 4% of their account balance the first year and adjust up each year due to inflation -- without risking running out of money.

Unfortunately, many experts now advise being more conservative in setting a withdrawal rate since longer life spans and less optimistic projections for future returns suggest you could run out of money too soon if you follow the traditional rule.

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A digital screen says Account Balance Zero.

15. The death of a spouse can be a financial disaster

Finally, it's important for retirees to consider the reality of what a spouse's death could mean. When one partner dies, one of the two Social Security checks that was coming stops. If that person had a pension, the payments will likely also come to an end.

Every senior couple needs to be sure there's enough money for the last surviving spouse to live comfortably until the end of their life.

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Jar full of cash and labeled Retirement.

Make sure you're prepared for these retirement realities

Preparing for these realities of retirement can help you to ensure you have the money you need to cover all the costs coming your way. The sooner you realize these truths, the more prepared you can be to fund a comfortable lifestyle in your later years.

The Motley Fool has a disclosure policy.

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