A recent study about the cost of retirement by Merrill Lynch and Age Wave – an Emeryville, Calif.-based firm that focuses on issues relating to an aging population — comes to two unnerving conclusions.
One is that the average cost of retirement is more than $700,000 – about two-and—a-half times that of the average house and nine times more than the average cost of a college education. The second is that most Americans are woefully unprepared financially. In fact, the study says, 81% of Americans don’t even know how much they’ll need to fund their retirement.
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A third conclusion – not explicitly expressed by the study but patently obvious – is that a distressingly high percentage of Americans will have to keep working in retirement to survive, perhaps until the end of their lives. (What the study does conclude on this front is that Americans overall are saving less than one-fourth of the amount they think they should be saving for retirement. And a third of adults have no retirement savings whatsoever.)
In fairness, there are benefits to working in retirement, and not just the money. The Merrill Lynch/Age Wave study finds that the top three benefits of continuing to work in retirement are mental stimulation, physical activity and social connections – all important benefits for all retirees. Nonetheless, many retirees would no doubt like to have a choice in the matter.
Is $700,000 An Accurate Number?
Let’s step back and think about this study a bit, starting with the $700,000 figure.
For many, it probably seems overwhelming. True, most retirees get Social Security and some a pension. But Social Security doesn’t come close to paying all the bills and pensions have increasingly become a scarce commodity. Maybe there is a way out of this conundrum, some older people no doubt believe. Maybe $700,000 is an exaggerated figure.
Unfortunately, it is not. Actuarial tables show that people who live until age 65 on average are likely to live more than 20 years longer. Say, for example, you spent $60,000 a year in retirement. That would exhaust the $700,000 in less than 12 years. Or say you spend a more modest $40,000 annually. That would exhaust $700,000 in less than 18 years.
Healthcare Is the Biggest Retirement Expense
Healthcare often turns out to be the biggest expense in retirement. According to a report by health data provider Health View Services, a healthy couple retiring at age 65 will pay about $270,000 for healthcare in retirement. This, too, may seem exaggerated at first blush. After all, most retirees have Medicare and many have supplemental healthcare insurance plans. So what is the problem?
The answer is that there are also many people who don’t have supplemental health insurance, which, while reasonably priced, is nonetheless more expensive than Medicare, their primary health insurance. If you have surgery, Medicare without a supplement covers only 80% of the price tag.
The bigger issue is the possibility of requiring long-term care in retirement. Most retirees do not have long-term care insurance, and in some states, one month in a nursing home can cost as much as $9,000. “This becomes super expensive super-fast,” says Scott Sadar, an executive vice president at Somerset Wealth Strategies in Portland, Ore.
Ironically, studies show, many retirees worry about their health and more than half worry about contracting dementia or Alzheimer’s. Yet at the same time, they don’t want to be a financial burden on their children. How does this compute? It doesn’t, Sadar says, adding: “Many hope that a heart attack will take them out when the time comes.”
Why So Little Retirement Financial Planning?
There are several reasons why most people don’t plan financially for retirement.
Many don’t track their living expenses as adults and so, lacking the experience, find it especially difficult to do so as retirees. In addition, for most of us, retirement is way out in the future, “and life gets in the way,” Sadar says. Surveys also show that many Americans 50+ are willing to overspend to help their children live a more comfortable life, simultaneously hoping they can rely on their children for some financial help in their old age.
“Unfortunately, their kids often never get that message,” Sadar says.
Yet another factor is the sheer difficulty of accurately planning retirement finances. The fact is that the only people who know how long they will live are the terminally ill. “What if you live 20 years, instead of 15 years, and you also need extensive care in your last five years?” Sadar asks rhetorically. “How do you plan for that?”
In the end, the biggest obstacle of all may be the steep challenge of living a relatively comfortable lifestyle and simultaneously putting away enough to assure that your maintain your standard of living in your golden years. According to the Merrill Lynch/Age Wave study, the average annual savings rate in America is less than 6 %. That is up from a low of roughly 3% during the last recession but less than the peak rate of 13% in the early 1970s.
It’s not that there aren’t steps to be taken to achieve financial satisfaction in retirement, experts say. Disciplined middle-class people can identify these and execute them. A proper mindset, however, is required. “You have to accept tradeoffs,” Sadar says.
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