Key issues about retirement finances are misunderstood by many Americans who are retired or within 10 years of retiring, and those misunderstanding reduce the probability of having a successful retirement.
The misinformation and confusion covers the spectrum of retirement finance topics, according to a survey conducted for Nationwide Financial Services.
About 72% of respondents worried that Social Security would run out of money in their lifetimes. In fact, the annual report from the trustees for Social Security and Medicare indicates that even after the trust fund is exhausted (projected to occur around 2032) the payroll taxes paid into the system should pay indefinitely for about 70% of promised benefits.
This widespread belief that Social Security will run out of money might be why so few people take the time to understand the program and how to maximize their benefits. The survey found large majorities were misinformed about basic features of Social Security. The result is they leave a lot of money on the table. Some experts estimate that it’s not unusual for married couples to lose out on $200,000 or so of lifetime benefits because of poor Social Security decisions.
More than half of respondents were not aware that Social Security benefits are guaranteed for life and indexed for inflation. Social Security is the foundation of retirement finance for many people because of those two features, and it is the only source of guaranteed income for many people.
Those features also are why many longtime retirees report that Social Security becomes their major source of income later in retirement.
Social Security benefits need to be understood and decisions planned carefully. Use online calculators to estimate the benefits under different scenarios or consult with a financial planner who knows Social Security well.
Most people don’t know the key elements that determine their level of Social Security retirement benefits and how to maximize those benefits.
Only about a third of respondents knew their full retirement age, the age at which you can receive full Social Security benefits without a penalty. Most, even those already retired, thought they were eligible for full benefits before they really were.
In general, future retirees overestimate how much they’ll receive in benefits. Most expect to receive about 30% more in benefits than current retirees receive. About 25% believe the program should provide enough income for them to live comfortably in retirement, and 55% said Social Security would be their primary source of income throughout retirement.
Medical expenses disrupt retirement plans, because people underestimate health problems and their out-of-pocket cost of medical care.
In the survey, about a quarter of those already retired said medical expenses don’t let them live the retirement they expected. About 80% of retirees said health problems occurred sooner than they expected, with 63% saying health issues began interfering with retirement more than five years before they expected.
Many people enter retirement believing Medicare will pay for all or most of their medical expenses. In fact, there are many expenses not covered by Medicare. It doesn’t cover dental or vision expenses at all and has very limited prescription drug coverage. For most covered care, there’s 20% coinsurance. You’re responsible for 20% of the cost without limit.
Many people still significantly underestimate average life expectancy, and that means they don’t have a plan that will fund their full retirement.
While the average 65-year-old woman today has a life expectancy of 86.6 years, most retirees and near retirees guessed life expectancy was about three years shorter. Many guessed a considerably shorter life expectancy. Of course, half the population lives longer than the average life expectancy. It’s hard to accurately plan for retirement without a reasonable estimate of life expectancy.
This is just a sampling of key misunderstandings people have about important factors in their retirement plans. Before and during retirement, it’s important to identify the key risks to retirement and develop strategies to reduce those risks so you’ll have a successful retirement. The key steps to take are:
- Determine the standard of living you want in retirement. Make a realistic estimate of the cost of that lifestyle and begin to match it with your expected cash flow.
- Establish guaranteed lifetime income to cover basic living expenses. That means first maximizing Social Security benefits, and married couples need to coordinate their benefit decisions. Additional guaranteed lifetime income can be obtained by purchasing either an immediate annuity or deferred income annuity (longevity annuity).
- Plan for the medical expense wildcard. You need to know the gaps in Medicare and minimize them by either joining a Medicare Advantage plan or obtaining Part D Prescription Drug insurance and a Medicare Supplement (Medigap) policy.
- Have a plan for long-term care expenses. For most people, the bulk of needed long-term care expenses should be funded by insurance. You can buy a stand-alone traditional long-term care insurance policy. You also can buy the more popular annuities or life insurance policies with long-term care riders, often called policies or asset-based long-term care policies.
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