A long, happy retirement is the great American dream. Perhaps you’ve watched with jealousy as friends and family have entered retirement. They’ve traded in the daily grind for senior living on their own terms. At least, that’s the impression you get.
However, there is a lot more to retirement than meets the eye. Without careful planning, you might be in for some big surprises. Here are seven secrets about retiring that no one wants to talk about, but that you need to hear. Knowing these facts can help you boost your chances for an enjoyable retirement.
Your Retirement Might Last Longer Than Expected
Retirement planning would be a lot easier if you had a crystal ball that could tell you how long you will live. Then, you would know how many years you will need to support yourself without income from a job.
Unfortunately, many people don’t even think about life expectancy when it comes to retirement planning. “We’re all talking about the fact that we need to plan for a longer life,” said Nancy Doyle, a chartered financial analyst and author of “Manage Your Financial Life.” “People often forget that means we need to plan for a longer retirement.”
On average, a man who reaches 65 today will live until age 84.3, and a woman who reaches 65 can expect to live until age 86.6, according to the Social Security Administration. That can mean 20 years — or more — in retirement.
For some people, retirement can be 30 years or longer. Among 65-year-olds, 1 in 4 can expect to live past 90, according to the SSA. One out of 10 will live past 95.
As you plan for retirement, consider that it might last a few decades. Take care of your health so you can enjoy retirement, Doyle said. Make sure you have enough saved to live comfortably, or have a plan to continue working in retirement to generate income to cover costs.
You Need a Plan to Stay Busy
You might be dreaming of a life of leisure in retirement. But you quickly can become bored if you don’t have a good idea of how you’ll spend your days.
“You should have a game plan to keep yourself busy and thoughtfully engaged,” said Dean Hedeker, an estate planning and tax attorney and owner of Hedeker Wealth in Lincolnshire, Ill. Without a plan, your health and spirit might decline, he said.
“Based on my experiences serving clients, the people who are 90 years old and keeping busy doing something are young and have spirit,” Hedeker said. “They are not home just watching TV; they are thoughtfully engaged.
Plan to stay physically active in retirement by exercising regularly. Continue to work in a paid or volunteer position to stay mentally engaged, Hedeker said. Also, pick up new hobbies. Take courses online, at a community center or at a local university or community college. You can even move to one of many retirement communities that offer a variety of activities to keep you busy.
“The retirees who have a plan to stay active and engaged live the fullest lives in retirement,” Hedeker said.
How Early You Claim Social Security Affects How Much You Get
It’s no secret that you can start collecting Social Security retirement benefits as early as age 62. In fact, the most popular age for claiming benefits is 62, according to the Center for Retirement Research at Boston College.
But people often are surprised by how much their benefits are reduced by claiming Social Security early, Doyle said. “If you start to take benefits at 62, you could receive 30 percent less for your payout,” she said.
Your Social Security check also can be reduced if you claim benefits before full retirement age, continue to work and earn more than the yearly income limit. If you earn more than $16,920 in 2017, you’ll lose $1 in benefits for every $2 you earn above the limit.
To get your full benefit, you have to wait until your full retirement age to claim it. The full retirement age is 66 for people born between 1943 and 1954, and it increases by two months up to age 67 for every birth year after 1954 up to 1960. For those born in 1960 or later, the full retirement age is 67.
However, you’ll be better off waiting past your full retirement age to start collecting Social Security. “If you wait until 70, your benefits increase 8 percent a year,” Doyle said. Don’t make a Social Security mistake. Social Security checks are small to begin with — the average is $1,360 — so people should delay claiming benefits to get a bigger payout, she said.
Health and Long Term Care Costs Might Drain Your Retirement Savings
The high cost of healthcare in retirement and can be a surprise. A 65-year-old couple retiring in 2016 was expected to need $260,000 to cover healthcare costs during retirement, according to Fidelity’s Retiree Health Care Cost Estimate. The costs might be even higher by the time you retire.
“Healthcare costs are soaring two to three times greater than the inflation rate,” Hedeker said. “Do you have the reserves to pay for rising healthcare costs? It’s a big thing that may change the age at which you decide to retire.”
You can sign up for Medicare at age 65 to help cover medical costs. You typically don’t have to pay a premium for Medicare Part A, but it only covers hospital stays. You’ll have to pay a premium for Part B coverage for doctor’s visits, Part D coverage for prescription drugs or a Medigap plans to supplement Medicare coverage.
To offset premiums, look for ways to cut health costs, such as opting for generic drugs or comparing prices among providers. You also might be able set aside money in a health savings account while you’re still working. If you have a high-deductible health plan, you can make pretax contributions to an HSA and withdraw funds tax-free for qualified medical costs — both now and in retirement.
You also need to factor in long-term care, which could wipe out your retirement savings. According to the Department of Health and Human Services, 70 percent of people who reach age 65 will need some form of long-term care in their lives. Such care involves assistance with the activities of everyday life, like dressing, bathing and eating. The average annual cost of care in an assisted-living facility is more than $43,000, and the average cost of a private nursing home room is more than double that, according to insurer Genworth’s annual Cost of Care survey.
Medicare typically does not pay for long-term care. Getting a long-term-care insurance policy can help you avoid going broke paying for long-term care on your own. Long-term-care policies typically cover the cost of care up to a daily limit in your home, assisted living facilities, nursing homes, Alzheimer’s facilities and hospice care.
Taxes Can Have Big Impact on Your Retirement Income
Taxes can impact how much income you’ll have in retirement from Social Security or retirement savings. For example, you might have to pay taxes on your Social Security benefits, especially if you have income in addition to your benefits. Up to 85 percent of your benefits might be taxable if your adjusted gross income plus nontaxable interest plus half of your Social Security benefits total more than:
- $34,000 if you’re single
- $44,000 if you’re married and filing jointly
You’ll also have to pay income taxes on withdrawals from tax-deferred retirement accounts such as traditional IRAs and 401ks. As a result, you might have to withdraw more than you thought each month just to cover the tax bill. Additionally, if you don’t start taking withdrawals from an IRA or 401k by age 70 ½, you might be hit with a big tax penalty.
You can escape taxes on some retirement income. Withdrawals from a Roth IRA are tax-free. And profits from the sale of stocks and other investments not held in a tax-deferred retirement account are taxed at the federal capital gains rate. For most taxpayers, that is either 0 percent or 15 percent.
If you have several retirement accounts, how you pull money in retirement will affect how much you pay in taxes. “You can increase the longevity of your cash flow by about seven years by withdrawing from one account versus another,” Hedeker said. “Extending your cash reserves by seven years is not insignificant, so you’ll want to have a strategy for which accounts you pull (from), and in which order.”
Related: Hidden Tax Breaks for Retirees
You Might Obsess Over Your Investments
If your investments are in a retirement account such as a 401k, you probably aren’t checking daily to see how they’re performing. “When we are working full time, typically we are not obsessed with our investments,” Hedeker said. Even if the market drops, you know your investments will likely have time to recover before you need the money in retirement.
However, it’s a different story once you retire. Hedeker said that many of his clients start obsessing over their investments in retirement — “looking at their accounts every day or even every minute,” he said.
Of course, the stakes are higher when you’re relying on that money to live, the market drops and your retirement account balance falls. That’s why it can be smart to shift some of your asset allocation in retirement to conservative investments, such as bonds or bond funds.
Once you do so, find something else to keep you occupied. “You must avoid the urge to react emotionally to market swings,” Hedeker said. “Do something other than watching the market.”
You Might Feel Overwhelmed by Your Finances
Your life might seem like it will be simpler in retirement. But Doyle said that retirees often end up feeling overwhelmed by their financial situation. Disorganization often is the cause of this chaos.
Older adults often have many accounts, documents and files. “That can be truly overwhelming,” Doyle said. A good way to get organized and simplify your financial life is to get your adult children involved in the process.
Doyle recommends getting your children to help you with a financial spring cleaning. Determine which documents you need and which can be shredded. Then create a filing system. Also create an “in case of emergency” file that contains important documents, a list of all accounts and contact information for the companies where the accounts are held.
You also should create an “in case of emergency” plan for your children that provides them with information about how to access accounts and other important information. The children can use this if an emergency or health issue leaves you unable to manage your finances on their own.
You shouldn’t be reluctant to tell your children information about your finances. “It’s really important for everyone to be involved because it will reduce the stress,” Doyle said. “You’ll enjoy your retirement more if you’re not feeling overwhelmed.”
About the Author
Cameron Huddleston is an award-winning journalist with more than 18 years of experience writing about personal finance. Her work has appeared in Kiplinger’s Personal Finance, Business Insider, Chicago Tribune, Fortune, MSN, USA Today and many more print and online publications. She also is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances.
U.S. News & World Report named her one of the top personal finance experts to follow on Twitter, and AOL Daily Finance named her one of the top 20 personal finance influencers to follow on Twitter. She has appeared on CNBC, CNN, MSNBC and “Fox & Friends” and has been a guest on ABC News Radio, Wall Street Journal Radio, NPR, WTOP in Washington, D.C., KGO in San Francisco and other personal finance radio shows nationwide. She also has been interviewed and quoted as an expert in The New York Times, Chicago Tribune, Forbes, MarketWatch and more.
She has an MA in economic journalism from American University and BA in journalism and Russian studies from Washington & Lee University.