Retirement Expectations vs. Reality: Planning for an Accurate Retirement
Young people tend to have a vision of later adulthood that often doesn’t exactly line up with reality. They might picture themselves surrounded by family despite an utter lack of romantic prospects, or they might imagine themselves with strengthand health though they currently eat poorly and inadequately exercise. However, perhaps the worst misunderstanding about old age that young people tend to harbor is that they will be able to maintain their current lifestyle, or perhaps live in even greater luxury, without working right now to save for retirement.
Because retirement is so far away, most young people put off any saving efforts with the expectation that they will have time and more funds at some later date. Unfortunately, this is just one of several misapprehensions about retirement that young people need to correct to ensure a long, healthy and comfortable period after they stop working.
You Need to Save X Percent of Your Income
Personal finance experts want to make it easy for people to gain control of their finances, so most will have a magic number for how much money a person needs to save for retirement. This number can vary widely, from just 15 percent of a person’s income per year to over 70 percent of a person’s income.
Unfortunately, there is no magic retirement savings number that applies appropriately to all people. How much a young person saves every month (or every year) depends on myriad factors, to include when they start saving for retirement, when they hope to retire, their general health, their lifestyle, their area’s cost of living and much more. To get an accurate picture of how much retirement savings is necessary, a person needs to breakdown all potential retirement expenses — and overestimations are safer than underestimations. It might be useful to do these calculations in a retirement planning app.
Retirement Doesn’t Last That Long
Children have difficulty imagining young adulthood, and likewise young adults struggle to understand what old age is like. Too often, people in their 20s and 30s anticipate that life after retirement will be brief and that death will come swiftly — but that is increasingly not the case. Vastly improved medical care coupled with enhanced nutrition is extending lifespans beyond what once was normal. Assuming a person retires at 65, they should expect at least 20 full years of life plus more if current trends for longevity continue.
What’s more, more and more retirees are opting to end their working lives early. Though technically retirement age is 65, most people retire between the ages of 55 and 62, which adds an additional number of years when retirement savings will be critical.
Planning to remain employed into old age isn’t an ideal strategy, either. Though many people retain their health into their 50s and 60s, the body and mind are much more susceptible to injury and disease. One major health event at this age could prevent a person from working, forcing them into retirement whether they have the savings or not. Thus, starting retirement savings early is essential for safety and security.
Social Security and Medicare Are Sufficient
There are government programs designed to help seniors find some level of financial security as they age — but these programs do not come close to providing the level of expendable income that most retirees expect and desire. For many, retirement is supposed to be a time of comfort and even semi-luxury, when people finally have time for travel and relaxation. However, Social Security payments provide only enough for a meager lifestyle, and Medicare does not do nearly enough to cover significant health expenses that begin to accrue in advanced age.
Financial experts describe retirement as having three legs: Social Security, employer contributions and personal savings. While Social Security benefits do help, they cannot support retirement on their own. Starting young to build employer contributions and personal savings is the best strategy for ensuring a comfortable retirement.
Retirees Don’t Experience Taxes or Debt
Because retirees are (usually) not employed, they do not endure payroll taxes — but there are other taxes that do affect those in retirement. Withdrawals from 401(k)s are taxed as income at the same rate as income earned through employment, and both the initial investment and gains are taxed when money is withdrawn from a traditional IRA. Additionally, a certain amount of Social Security benefits are subject to tax, as well.
Retirement does not negate any debt accrued during adulthood. Retirees who have mortgages and credit cards are still responsible for paying down this debt. Unfortunately, as a result of insufficient retirement savings, many retirees need to take on more debt to pay for regular costs of living or medical expenses.
Just as many teens need a more realistic depiction of adulthood to make adequate plans for their futures, young adults need to wise up regarding the reality of retirement. By learning the difference between myth and truth, people will have greater opportunity to save and secure a comfortable retired life.