Retirement planning is critical if you want to enjoy your later years instead of worrying about money all the time. Unfortunately, many people aren’t realistic about retirement and are at risk of ending up with a major financial shortfall because of it.

You don’t want to be one of those people so it’s time to come to terms with five brutal truths that will help you make better choices as you make your plans for your later years.  Here’s what they are.

1. Your withdrawal rate needs to be lower than you think 

The first brutal truth to come to terms with is that you most likely can’t withdraw as much from your retirement accounts as you hoped.

For a long time, many retirees have based their withdrawal rates on the 4% rule. This rule said you could take 4% out of your investment account in the first year of retirement and make annual adjustments to this amount to keep pace with inflation. The theory was that if you stuck to this amount, your money would last at least 30 years. 

Recently, however, experts have adjusted this recommendation. A safe withdrawal rate is now 3.7% instead of 4.00%. This downward revision was driven by lower future projected returns for investments and by the fact that life spans are getting longer. 

Unfortunately, this can make a meaningful difference in the income available as a retiree. If you have $1,000,000 saved, your accounts will produce $3,000 less in income a year — which is a lot, when your nest egg was only producing $40,000 to begin with under the 4% rule. 

Be prepared for this lower withdrawal rate and make sure your nest egg is large enough to cover your needs without taking out too much money too soon.

2. You probably aren’t working until your 70s

The 2023 EBRI/Greenwald Research Retirement Confidence Survey revealed that future retirees are very unrealistic about when they will retire. In fact 33% said they plan to work until at least 70 and the expected median age of retirement is 65 among current workers. The reality, however, is that the actual median retirement age is only 62 and only 6% of workers end up working until they are 70 years old. 

Most people planning to work until 70 are doing so out of financial necessity — not because they just love their jobs so much.  That creates a huge problem when early retirement arrives unexpectedly, as leaving work ahead of a planned schedule means you won’t have time to save as much, will need your savings to last longer, and may need to claim Social Security earlier than planned — which shrinks your benefits. 

Rather than basing retirement goals around a late departure from work, it’s better to assume you will leave work at 62 when you set savings goals. If you prepare for early retirement and it turns out you can work longer, you’ll get the bonus of having more time to save. That’s a better position to be in than expecting an unrealistically long working life and being forced to leave with insufficient funds. 

3. Social Security benefits aren’t enough to live on

Sadly, there’s another harsh reality everyone needs to be aware of. Your Social Security benefits probably are not going to do as much to cover your costs in retirement as you might think.

The sad truth is that benefits are only intended to replace around 40% of what you were earning and no one can afford such a huge cut without drastic lifestyle shifts. Plus there’s real concern the trust fund could run short in 2035, leaving Social Security with only enough money to pay 83% of promised benefits.  Lawmakers may step in to fix this problem, but the result of that could be cuts to benefits that still leave you with less.

It’s important to be realistic about the role Social Security will plan in retirement so you don’t over-rely on these benefits and end up broke.

4. Healthcare can cost six-figures

You probably know you’re going to have healthcare expenses in retirement, but chances are good you’re underestimating just how much you’ll need to spend. According to Fidelity Investments Research from 2024,  a 65-year-old retiring last year was looking at an average of $165,000 in healthcare costs during retirement. 

That’s a lot of money and can drain your nest egg if you don’t have dedicated savings for your medical needs.

If you’re eligible to invest in a health savings account while working, this is a great place to invest to pay for medical services as you can make tax-free contributions and enjoy tax-free withdrawals. If you end up healthier than expected, you can also take money out of an HSA  for any reason during retirement but will be taxed at your ordinary income tax rate so the account will behave like a 401(k). 

5. Taxes and inflation are going to reduce your buying power more than you think 

Finally, you must consider how taxes and inflation are going to impact your retirement income, as they may have a bigger impact than you think.

When most people think about a $1 million nest egg, it sounds like a lot. But, if you are 20 or 30 years away from retirement, $1 million isn’t going to have nearly the buying power it does today.  You’ll also have to pay taxes on distributions from traditional retirement accounts and if your provisional income exceeds $25,000 as a single tax filer or $32,000 as a married joint filer, will be taxed on at least part of Social Security benefits.

Provisional income is half of Social Security benefits plus all taxable and some non-taxable income.   Unfortunately, the thresholds at which benefits become taxable are not indexed to inflation, so more retirees each year lose some of their benefits to the IRS. If you are a long time away from retirement there’s a good chance you’ll be one of them. 

When estimating whether your retriment accounts will be large enough, you need to consider both the amount you’ll owe your state and local government and how inflation will reduce your buying power.  This will help you set a more realistic goal for how much you actually need to save. 

Now, you may not want to hear all of these harsh truths. But, you need to know the reality so you don’t base your plans on false assumptions of an easier financial future. Once you realize the truth about your savings, Social Security, and financial needs as a retiree, you can make sure you have the money to fund the retirement you deserve. 

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