Getting older is a difficult thing to face. Unfortunately, it also comes with certain financial considerations that will affect your retirement planning. Here are 10 hard financial truths about aging that you can’t afford to ignore.
10 Hard Financial Truths About Aging You Can’t Afford to Ignore
1. Older adults often develop chronic illnesses and disabilities.
One of the most difficult financial truths about aging is that time spares no one. As you get older, you will have more health complications as your body slows down. You also have increased chances of developing chronic illnesses and disabilities as you age, even with a healthy lifestyle. Based on current statistics, approximately 36% of adults over 65 indicate they have at least one disability.
Although it may be a natural consequence of aging, certain conditions can be expensive to treat and manage. If it happens early in your retirement, it will be tougher to absorb the costs and extend your savings.
2. Your healthcare expenses will increase when you retire.
While you will spend less on transportation and other daily expenses, healthcare is one budget category that will have increased costs after you retire. Even if you expect to spend more, you may not realize the full financial impact until you work out the calculations. The average American between 35-44 only spends 7.3% of their income on healthcare costs. This figure increases to 14.2% for adults over 75.
Unfortunately, it’s impossible to know how much you need to save for your healthcare because you can’t predict what conditions you will develop. Knowing your family’s medical history can give you some insights. But starting an HSA may be a smart idea to help supplement your retirement savings.
3. Most people who retire at 65 will live another 20 years.
Another major unknown is how many years to plan for. Based on the current numbers, the average American lifespan is about 77 years. However, many people will live much longer than that. One in three will live passed 90, and one in seven will celebrate their 95th birthday. Therefore, the Social Security Administration indicates that people should plan for at least 20 years of retirement income.
While we should celebrate the advances in modern medicine, sustaining a high quality of life through those years won’t come cheaply. Rather than run the risk of outspending your savings, you may have to adjust your retirement goals and increase your rate of savings.
4. Pensions are becoming a thing of the past.
It used to be the standard practice for employers to offer fully-funded retirement accounts. But, it seems like pensions are becoming a thing of the past. Today, only 30% of households have pension plans.
Most employers have switched to 401(k) savings plans instead. This is a much different scenario than previous generations. Even if your employer matches your contributions, the financial responsibility of retirement will depend on your ability to save.
5. Social security won’t be enough to fund your retirement.
Some people fail to plan for retirement because they expect their Social Security benefits to take care of everything. Another of the sad financial truths about aging is that your benefits will barely cover a bare-bones budget.
While they were once enough to support a person comfortably, your check won’t be enough to live on during retirement. As of 2022, the average monthly benefit is $1,700. You can delay taking your benefits until age 70 to maximize your benefits. But no matter what way you slice it, you will need supplemental income if you plan to live above the poverty line.
6. Housing will account for over 40% of your budget.
Many people assume that if you own your home, you won’t have to pay much for housing after retirement. Sadly, that isn’t the case. Although financial advisors recommend that you spend no more than 30% of your income on housing, it accounts for over 40% of household expenses for older Americans. This number slightly drops to 38% from those over 75. But, it is still a disproportionate amount, especially for those living on a fixed income.
7. By 2030, an estimated 32% of older adults will still be working.
The cost of living and inflation rates have continued to rise, but salaries and wages have not kept pace. With reduced purchasing power, it becomes harder to support yourself and even harder to save for retirement.
Another harsh reality is that low-income earners may never earn enough to retire. Analysts predict that by 2030, 32% of Americans between the ages of 65-74 will still be a part of the workforce. Even though many seniors keep working for social reasons, 17% of surveyed adults said they needed to work to make ends meet. As the wealth gap grows wider every year, this number is likely to increase as well.
8. The later you start saving, the harder it will be to build a large nest egg.
Smart investors know that the sooner you start, the better off you will be when you reach retirement age. The younger you begin investing, the more time your money has to grow.
If you take advantage of compounding interest and make consistent contributions, you will set yourself up well later in life. However, it becomes harder to save significant sums the later you start. Remember, it’s never too late to begin. But, those who start planning in their 20s will be in a much better position than those who put it off or don’t invest at all.
9. You should be saving at least 10% of your income.
As a general rule of thumb, financial advisors suggest that you save a minimum of 10-15% of your income toward your retirement. So if you make $50,000 a year, at least $5,000 should go into your retirement accounts.
If you haven’t been practicing this rule, you still have a few options. You can increase your contributions to make up for the lost time. Or, you may have to adjust your lifestyle expectations since you will have less to live on.
10. It is becoming more expensive to retire.
Since you no longer earn a salary, you must sustain yourself with your benefits, savings, and investments. But unfortunately, it is becoming more expensive to retire. First, there is the increased cost of living. While you would normally account for an inflation rate of 3-4%, it has been much higher lately. Then, there are the increased costs for utilities, groceries, gas, and healthcare you must account for as well.
Furthermore, the amount you need to live comfortably will depend on several factors, including where you retire and the type of lifestyle you want. Most financial advisors recommend a budget of 80% of your pre-retirement income to maintain your current lifestyle. So, if you multiply that by 20 years of retirement, it should give you a ballpark figure of what you will need.
Don’t Outspend Your Retirement Savings
One of the hardest financial truths about aging is that your retirement accounts may not be enough. Financial analysts predict 40% of households aged 35-64 will spend their retirement savings before they pass. Even if you manage to save throughout your lifetime, life can present you with expensive challenges. You may have unexpected healthcare costs or find yourself supporting children or other dependents. And if the stock market performs poorly, your portfolio could experience significant financial losses.
Therefore, you must learn how to assess your budget and determine what you can afford. Learn how to live below your means now, and take precautions to protect your physical and financial health.
- 10 Financial Mistakes That Could Cost You Your Retirement
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- 4 Biggest Financial Regrets of Seniors From Their Twenties
Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.
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