Retirement Surprises: What I Wish I Knew About Retirement BEFORE I Retired
Last year, the Society of Actuaries (SOA) updated their 2017 Risks and Process of Retirement Survey, providing insights on how Americans decide to retire and manage resources in retirement.The study revealed that for most people, retirement is full of surprises. Most retirees’ experience a life different in many ways from what they originally planned.
Here are a 12 things that surprised retirees. Use these findings to improve your overall retirement plan for a happier and more secure future.
1. You will make it work and be quite happy!
When it comes to retirement, planning is everything. Yet even the best-laid plans can be affected by unexpected events.
However, the good news is that we generally get happier in retirement!
After the stress of building careers and raising kids, most people’s happiness seems to actually increase in retirement.
In fact, you’ll likely be shocked to learn which two ages in an adult’s life are likely to be at your happiest.
Experts from Princeton University and the London School of Economics and Political Sciences found that happiness peaks at the ages of 23 and 69.
2. Home repairs and other unexpected emergencies can wipe you out
The study found that “shock” events — retirement surprises — had a significant impact on the assets of many retirees. More than one in three respondents experienced financial shocks that depleted at least 25% of their assets.
The majority of retirees are worried about their ability to handle financial shocks:
Home Repairs: Only 18% of retirees are very prepared to handle home repairs. Home ownership is expensive. Repairs and maintenance, insurance and taxes and many of the most unexpected repairs are not cheap. From repairing a roof to replacing a broken furnace or air conditioning unit, home repairs can cost thousands of dollars and make a serious dent in retirement savings, especially for retirees who are often still paying off a mortgage.
When retirement is on the horizon, take a look at your home and consider what major repairs you might need to make in the next ten to 20 years. Either make them before you retire or set aside some money to take care of them in retirement.
If you are among those worried about potential home repairs, do consider downsizing and other ways to reduce your housing burden.
Car Repairs: Meanwhile, 27% of retirees feel very prepared to manage car repairs or replacement. Data from the Bureau of Labor Statistics, transportation costs are the second highest retirement cost — costing more than even healthcare.
Family Member in Need of Support: Retirees today run the risk of having to help their children AND their parents. We are the sandwich generation. And, only 8% of today’s retirees feel very prepared to help family members.
Setting aside funds for emergencies can help reduce your worry.
3. Many health care expenses will be paid out of pocket
Late last year, Fidelity Benefits Consulting released their latest retiree heath care cost estimate, and it is again a sticker shock for people nearing retirement.
According to the report, a 65-year old couple retiring today will need an average of $280,000 (in today’s dollars) to cover medical expenses throughout retirement, up from $245,000 in 2015.
These costs include Medicare premiums, co-payments and deductibles, prescription drug out-of-pocket expenses. Also, as the report from the Society of Actuaries notes, most retirees do not have dental insurance and dental expenses are not covered by Medicare. Routine eye care, hearing aids and the exams for fitting them are also not covered by Medicare.
If you’re able, a great way to save for out-of-pocket medical costs before retirement is a Health Savings Account. Employees covered by high deductible health plans can put money into an HSA pre-tax during their earning years, then withdraw the money tax-free to use to health care costs later on.
4. Divorce is becoming more common for retirees
A 2015 study by Bowling Green State University sociologists noted that the divorce rate for people over age 50 doubled between 1990 and 2010, from fewer than one in ten to more than one in four.
In most cases, divorcing couples split assets in half during the divorce settlement. All of a sudden, what may have been plenty of money to live on during your retirement years doesn’t look like much.
If you divorce during your working years, you have some time to work hard, and put money away to try to recover from the loss. But divorce during retirement means you’re out of time for making up those lost assets.
If you are worried about divorce, try:
- Exploring tips for divorce in retirement.
- Running a scenario using a the NewRetirement Planner with what your finances might look like after divorce.
5. Long-term care generally isn’t covered by Medicare
If you become disabled, the cost of assistance with daily living tasks generally isn’t covered by Medicare. Most people dream of a retirement spent being active, golfing, traveling, gardening, or just spending lots of time with loved ones.
Unfortunately, that dream doesn’t last long for a startlingly high percentage of retirees.
According to the Administration for Community Living, 69 percent of retirees will need some form of long-term care, whether that is in-home or in a facility.
The AARP recommends buying long-term care insurance between 60 and 65-years-old for individuals and between 55 and 60-year-old for married couples. There is also a tax break for buying this coverage, which can help lower your overall costs.
One of the most unique aspects of the NewRetirement Planner is that it lets you “try on” different ways of planning for a long term care event. You can roughly model what happens if you buy long term care insurance, purchase a deferred income annuity, or opt to have a relative care for you.
6. Dividend income may not be safe or stable
In the past, retirees could finance a good percentage of their living expenses through stock dividends and interest payments on bonds. But for the last 20 years, it has become more difficult to make the case that you can retire on the income from stocks and bonds.
According to the Society of Actuaries’s 2019 Risks and Process of Retirement Survey, (printed in May 2020), only 12 percent of retirees say a taxable investment account provides a major source of income, and an additional 26 percent say their interest- and dividend-bearing accounts provide only a minor source of income.
There are many reasons dividends are a smaller part of the retirement income mix, including the historical trend of companies to pay out less of their profit in dividends since the 1990s and investors’ preference for growth stocks over value stocks. In reality, the majority of retirees depend on Social Security as their main source of income, and employer-sponsored retirement savings plans (your 401k) come in behind traditional IRAs for retirement income.
*Source: 2019 Risks and Process of Retirement Survey: Report of Findings, Society of Actuaries, 2020.
A strategy that emphasizes dividend income has several downsides. Many stable companies pay dividends, but investors can lose money if companies cut their dividends and investors are forced to sell shares for income.
Dividend investing is further complicated by the unreliability of dividends in the last 20 years. Retirees in 1990 with a portfolio containing General Motors, Barnes & Noble, General Electric and Washington Mutual Inc. could depend on a steady stream of quarterly income. After the financial crisis of 2008 and the COVID-19 crisis, many traditional dividend-paying stocks have cut their dividends or gone out of business entirely.
Investors interested in dividends can decrease their risk by buying dividend focused ETFs, but even these typically yield less than five percent.
Dividend investing can still be considered a good source of retirement income, but dividend-paying stocks should be balanced with other types of investments in a diversified portfolio.
- See the impact of dividend income on your retirement plan by entering it as “Other Income” in the NewRetirement Planner.
- Or, learn more about dividend income in Drip or Draw: What to Do with Stock Dividends in Retirement.
7. Retirement income is challenging to figure out
We’ve spent our whole lives working, spending the money we earn and hopefully saving a little too. When we retire, everything we have ever experienced about managing our own finances gets turned upside down. We no longer earn as much or any money from work.
The retirement surprise is that we have to figure out how to make do with and maximize what we already have. Instead of saving as much as possible, the new objectives include developing retirement income strategies — creating predictable retirement income out of what we have.
Explore 18 ideas for retirement income.
8. Time is more valuable than money
When you are free from the rat race — when you have the freedom to retire and get off the treadmill, you may come to realize that time is more valuable than money.
One study found that people who were extremely worried about retirement finances surprisingly found themselves to be much happier once they retired — largely because they had greater control over their time. In fact, the ability to control your own time is how many people are now defining retirement.
9. Inflation has a bigger impact in retirement than it did when you are working
In the SOA survey, 65% of pre-retirees and 48% of retirees said they think inflation will affect the amount of money they need each year in retirement at least somewhat. Retirement planning that doesn’t take inflation into account may meet the needs of retirees early in retirement but fail to address their needs ten to 15 years later.
Consider that from 1913 to 2013 the average US inflation rate was 3.22%. While that sounds reasonable on a year-by-year basis, that rate of inflation means prices doubled every 20 years.
Retirees are also more affected by cost increases in certain categories of spending that general cost-of-living indexes may not emphasize, such as Medicare premiums, health care costs and long-term care expenses. Cost-of-living increases in Social Security benefits have not kept pace with increases in these categories.
Inflation can be one of the more damaging of the common retirement surprises.
The NewRetirement Planner allows you set and change your own pessimistic and optimistic inflation rates — giving you a better picture of your future.
10. Other unforeseen events in the financial markets can sink well-laid plans (Coronavirus anyone?)
Potential stock market declines or losses in the housing market are reasons to worry about retirement.
In fact, the research indicates that very few retirees feel ready for these financial shocks:
- Only 14% of retirees feel ready to deal with a drop in their home’s value
- 8% are prepared for the possibility of running out of assets
- 10% are ready for investment losses
In fact, managing your assets — your home and your savings — is important and complicated.
Many people do it themselves, but others seek help from a fiduciary financial advisor. NewRetirement recently introduced a low-cost advisory service that harnesses the power of technology to deliver extremely valuable advice and guidance for a more secure future. Talk to us about your concerns today!
11. Working longer may not be possible
The SOA survey found that today’s pre-retirees plan to retire at a considerably older age than current retirees actually retire. The median actual retirement age is 60, yet two in 10 pre-retirees said they plan to work at least until age 68 and 14% said they do not plan to retire at all.
While that’s an admirable goal, the fact is that many seniors are unable to continue working past normal retirement age. Surveys from the Employee Benefits Research Institute show that, since the economic downturn of 2008, about half of retirees left the workforce before they were ready. Some seniors are laid off from jobs they’d held for years; others have health problems that make working impossible. Even many “voluntary” retirements are actually pushed by companies offering early retirement packages or workplace cultures that are inhospitable to older workers.
Many retirees who find themselves in this position turn to “bridge employment,” a job that may be part time and pay less, but helps bridge the gap between their last job and full-time retirement.
The NewRetirement retirement calculator let’s you set different work income levels for the transition to retirement — giving you a more accurate and realistic plan.
12. Depression is Common
While it IS very likely that you will be happy in retirement, retirement depression is surprisingly common.
A study published in the Journal of Population Ageing found that those who were retired were about twice as likely to report feeling symptoms of depression than those who were still working. And, research from the London-based Institute of Economic Affairs found that the likelihood that someone will suffer from clinical depression actually goes up by about 40% after retiring.
Learn more about how to combat retirement depression.
Identifying potential gotchas and surprises as part of your retirement plans
While most retirees seem to just “roll with the punches” and adapt as financial troubles happen, it might be better to learn from people who are already retired and adapt “forewarned is forearmed” as your retirement motto…
Or, better yet, maybe the best strategy for your retirement is: “hope for the best, plan for the worst.”
NEW Confidence Rating in Retirement Planner! A new feature in the NewRetirement Planner guides you through the process creating a plan you can feel great about.
There are four phases to creating a reliable plan:
- Documenting adequate detail
- Achieving a plan where you have adequate savings given optimistic projections
- Anticipating retirement “gotchas” like the surprises described below in this article
- Maximizing your wealth
Create an account or log in right now to find out which phase you are in. The NewRetirement Planner makes it easy to create and maintain a plan.