Planning for retirement can be difficult because there is so much to think about. Unfortunately, many people lack the important facts needed to make informed choices about retirement readiness.
To make sure you are ready for your golden years, here are four essential facts to know.
1. Health care will cost you a fortune
Health care is one of the most important expenses facing most seniors – but far too many people underestimate how much they will spend on health care and medical care. A national survey revealed that pre-retirees were expecting to spend 15% of their social security benefits on medical care. The reality is that those who claim social security at age 62 spend on average 64% of their health care benefits.
One of the reasons health care costs have so far exceeded our expectations is because of the significant gaps in Medicare coverage – especially for prescription drugs – that many people do not plan. In addition, the cost of long-term care is astronomical and you will probably need it more than you realize. In fact, a person who reaches the age of 65 today has a 70% chance of needing long term care at some point in his life.
Before retiring, it is imperative to have a plan to cover health expenses. If you have a high deductible health plan (HDHP), you can save money and even invest in a health savings account (HSA). You can withdraw funds from a duty-free HSA as long as they are used to cover eligible health care expenses and these funds never expire. If you are not lucky enough to have an HSA, spend a portion of your savings on the medical expenses of your retirement.
2. Social security will only replace a small percentage of your income
Future retirees responding to the Nationwide survey estimated that they would receive about 30% more in social security benefits than current retirees. The misconceptions about income that Social Security will provide could explain why more than one in four retirees think that Social Security will provide enough income to live in retirement.
The reality is that Social Security is designed to replace 40% of pre-retirement income, while most retirees need at least 80% of their income before retirement to make ends meet. Not having extra income to supplement social security benefits can mean living just over the poverty line at the end of your life.
You need to save money in a retirement account to provide you with additional income during retirement, beyond your social security check. The sooner you save, the better you will be retired.
3. You will probably help your children financially
Nearly 8 out of 10 parents with adult children provide at least one financial support. Chances are good that if you have children, they will not be completely independent when you retire.
When your kids are asking for financial help, it can be hard to refuse. Unfortunately, offering support can hurt your retirement savings. Careful budgeting will not take you that far if you still pay the allowance to adult children and if you distribute money to your children for a home or college, your retirement nest egg will suffer badly.
Unsettlingly, about three quarters of parents say that they put the financial needs of their children before the security of their own retirement. Plan the help you can offer your children, do not give more than that and make sure to save enough for your retirement to offer you all the help you offer to others.
4. Your retirement benefits could be taxed
Hopefully, when you approach retirement and look at your 401 (k) or IRA balance, you'll feel pretty good with the amount you see. But do not forget that you have to pay taxes on most of the money you withdraw (except if it 's a Roth account).
Generally, you are taxed on the distributions you receive at the rate of your regular income tax; the amount of tax you pay therefore depends on the tax bracket you occupy this year. The federal government also taxes most pension income. Therefore, if you are counting on an employer pension, this money will also be reduced according to Uncle Sam's reduction.
And, for social security purposes, your income is calculated differently. If your income exceeds 25,000 USD as a single filer or 32,000 USD for married couples, you could be taxed on at least 50% of your Social Security benefits and up to 85% of your benefits. Your income for this purpose is equivalent to half of your social security benefits, plus your taxable income and any non-taxable income, such as income from municipal bonds.
Depending on where you live, you will probably have to pay the state tax on IRA withdrawals and 401 (k), too. Your state may also levy taxes on pensions and social security benefits.
Do not forget these retirement facts
These four facts about retirement mean that you should increase your retirement nest egg above the level you had planned, in order to have a cushion to pay for health care, help your adult children and pay taxes. In addition, you will not rely too much on social security to earn your retirement income, as most Americans do.
Being fully informed about your financial needs during retirement will help you have enough money to be comfortable and not worry. The sooner you establish a solid plan for a secure retirement – which takes into account all of these facts – the better you will be in the last act of your life.