Retirement isn’t something you should just dive into. To enjoy your senior years to the fullest, it’s important to plan carefully.
That said, even if you make an effort to plan for retirement, certain misconceptions might get in your way. Here are some brutal truths about retirement you need to come to terms with.
1. You can’t retire on Social Security alone
A lot of people think they’ll manage just fine on Social Security once they stop working. But it may surprise you to learn that Social Security will only replace about 40% of your pre-retirement income, assuming you earn an average salary.
Why is this a problem? It’s common for retirees to need about twice that much money to cover their living costs without having to pinch pennies. For this reason, you should not plan to retire on Social Security alone.
2. Your portfolio may not provide as much income as expected
Ideally, you’ll have savings in an IRA, 401(k), or another account you can use in retirement to supplement your monthly Social Security checks. But you may not end up getting as much income from your portfolio as expected.
The money you save for retirement might need to last decades. So you can’t just take large withdrawals early on and hope for the best.
Let’s say you retire with $1 million. That might seem like a lot of money, but it might also need to last for 30 years or longer.
If you use the popular 4% rule to manage your nest egg, a $1 million portfolio gives you $40,000 of income each year, not accounting for the inflation adjustments the 4% rule allows for. But if you were hoping to take $75,000 or $80,000 out of your portfolio each year, that could mean having to seriously rethink your lifestyle.
It’s important to draw that conclusion ahead of retirement so you’re not caught off guard. The sooner you realize what income your portfolio might give you, the sooner you can compensate by doing things like working longer to save more or delaying your Social Security claim for larger monthly checks.
3. You may end up with less Social Security
We just learned that Social Security might only take the place of 40% of the income you’re used to earning. But that assumes that benefits are not cut.
The Social Security Trustees recently warned that the program’s combined trust funds could run out by 2034, at which point only 81% of benefits might be payable. Knowing that Social Security cuts are a possibility should prompt you to save more.
4. Healthcare costs could be astronomical
Many retirees find that healthcare is their biggest expense, or one of their largest. But you may be underestimating how much it will cost you.
Fidelity says that the average 65-year-old retiring this year could spend $172,500 on healthcare expenses through their senior years. Make sure you have room for healthcare costs in your budget. And if you have access to a health savings account, consider funding it and reserving that money for retirement, when you may need it the most.
5. Boredom could be a huge problem
It’s easy to assume that you’ll enjoy being retired. After all, you won’t have to get up early every day, go to work, or deal with an annoying commute.
But you may find that retirement is more boring than you expect. It’s not easy to fill your days when you don’t have a job.
Before you retire, make sure you have some sort of plan with regard to keeping busy. Otherwise, your mental health could take a serious turn for the worse.
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