I recently read an AARP article that I found interesting and thought I would discuss here. AARP did a survey asking retirees what they wish they had done differently before retirement. The article talks about six money regrets, regrets of actions individuals wish they had taken or not taken before retirement. While the six regrets are from the AARP article, the descriptions following each regret are my thoughts.
Regret #1: Skimping on saving: If you ask those that are soon-to-be-retired if they have saved enough for retirement, more than 70% believe they have. Yet, studies show that less than 40% of the individuals have the savings that are recommended by the experts.
We often find individuals do not understand the impact of inflation over time. Historically, with inflation around 3%, it tells us the cost of living doubles about every 24 years. If you retire at age 55, it means by the time you are around 80, it will cost you twice as much to maintain the same standard of living. While Social Security does increase (the increase for 2021 is 1.3%), Medicare premiums also go up and often eat up much of the Social Security increase. Pensions most often do not have a cost-of-living increase to them. This means that your savings – your retirement plan at work, your IRAs, and any other savings you have will need to help you manage costs going up due to inflation.
The second concern we talk about – many individuals think that their living expenses will decrease over time. Mortgages and other debts get paid off. Work-related expenses decrease – clothing and commuting costs may decrease, among others. Conversely, medical expenses often go up over time. As we age, many individuals must hire jobs such as mowing the lawn or shoveling snow that they used to do themselves. Homes are aging and upkeep costs tend to increase. Depending on how you spend your time in retirement, costs for hobbies, travel, and entertainment can increase. And – a recent phenomenon is adult children returning to live at home, sometimes with your grandchildren, are increasing household expenses.
There are several retirement calculators available to help determine what you need to save for retirement. One of the financial planner’s responsibilities is to help you determine if you are on track to save for enough for retirement. If you are not on track, we will offer suggestions on how to get you there. It is not just about how much you are investing. Consideration needs to be given to all the financial pieces of your life.
Regret #2: Avoiding the Stock Market: Again, this comes back to inflation. Standard savings accounts are paying less than ½ of one percent. Money market accounts and online banks are generally paying less than 1% interest. Bond interest rates are low right now too. Leaving all your money in these types of accounts means that you are not keeping up with inflation. You will be losing purchasing power, which is another risk, like market risk.
While the stock market does have the risk of going down, historically, over time, it has gone up and outpaced inflation. The money you will need in the short-term needs to be safe and maintained in a savings account or bonds. Funds that you will need later in retirement – five, ten, twenty, or more years out need to be in the stock market to try and outpace inflation. Gradually as you use your short-term funds, you will transition funds out of the stock market to be in those safe, more secure investments. This is a cycle that should continue throughout your lifetime.
Regret #3: Spoiling your kids: We often hear about parents trying to decide between paying for college for their children and saving for their retirement. There is the saying, “Your child can borrow for their education; you cannot borrow for your retirement,” which is absolutely true. Retiring with education debt may mean the inability to have the retirement that you plan because of money constraints. Saving early and consistently can provide the funds for a college education and for retirement. Using your retirement savings to pay for college education may mean becoming a financial burden to your children later in life, maybe even as they are trying to educate their children and save for their retirement.
Helping your adult children short-term during this pandemic may be necessary. Everyone needs to know it is a short-term arrangement. Children should have responsibilities and requirements during this time. This can be anything from helping with the grocery bill to doing chores around the house. Children paying their own way as much as possible gives them the incentive to move forward with their lives and not remain dependent long-term. While they may not be able to get their dream job, or even a job in their field, there are jobs available to provide some current income. Maybe they need to get a 2nd job to catch up financially. It may be appropriate to legally document a loan given and make sure that the loan gets repaid.
Teaching your children to be financially responsible from an early age can allow your retirement to be what you want it to be.
Regret #4: What do Roth 401(k)s, Roth IRAs, and Roth conversions all have in common? As each of these accounts grows, they will grow tax-free. A quick example – say you have $250,000 in retirement savings and are in the 25% tax bracket. After paying taxes on these funds, you would only have $187,500 available to use. If tax rates go up over time and as the accounts grow over time, you will owe more taxes. If the account doubles before you entirely use the funds, the tax burden could be $125,000 or more.
If that initial $250,000 was in a Roth-type account, your cash available would be $250,000. There are no taxes due. As the account grows and doubles over time to $500,000, it is tax-free. The cash availability is the full $500,000. Take advantage of Roth-type accounts where possible.
Regret #5: Ignoring long-term care: Long-term care costs are not covered under traditional health insurance and are not covered by Medicare. Whether you are trying to stay at home and bring in care or needing to go into a nursing facility, the costs can quickly deplete retirement funds. For many, long-term care insurance may be the answer. For others, it is not recommended. This is something that needs to be discussed with your financial planner and plans need to be made as to how costs will be managed. Studies have shown more than half of the individuals over the age of 65 will have some level of long-term care needs. This can be anything from a few hours a week of time with no financial cost to a nursing home at a cost of $100,000 a year or more.
Regret #6: Buying a timeshare: The average cost of a timeshare is currently over $21,000, with average annual maintenance costs of $1,000. Maintenance costs are often going up faster than the rate of inflation. Selling unwanted timeshares can be tricky, even impossible. Many individuals are unaware that these timeshares pass to children, and they have the burden of paying the maintenance fees or in many cases paying a legal firm to get them out of the contract. Airbnb, VRBO, Booking.com, and other similar sites can be less expensive and provide more flexibility.
It is not too early to start planning for your retirement – and it is never too late to start planning for your retirement. Consider these regrets and make plans to make sure these regrets do not become yours!!