One dream nearly all Americans share is, after decades of hard work, to retire in comfort. But retiring with a nest egg large enough to last throughout your lifetime is becoming a greater challenge than ever.
Will you retire later than the average retirement age?
According to SmartAsset, a technology-based personal finance company that provides financial modeling software to help consumers make major financial decisions, the average retirement age as of October 2015 in the U.S. was 63 years. This is more or less on par with the traditional retirement range of 62 years to 65 years. SmartAsset came to this conclusion by analyzing U.S. Census Bureau labor force participation data for people between the ages of 40 and 80 from 2009 through 2013. Age 63 was the age at which half the population was determined to no longer be working.
While the average retirement age has been pretty static for decades, there are five good reasons why you could retire much later than age 63, especially if you’re a Millennial, a member of Generation X, or even a younger baby boomer.
1. Social Security isn’t on solid footing
One of the biggest challenges facing retirees is that the Social Security program isn’t in great shape over the long term. The program has reliably paid benefits to retired workers, the disabled, and survivors of deceased workers for more than 75 years, but the retirement of baby boomers is causing the number of beneficiaries to balloon. By 2035, the worker-to-beneficiary ratio is expected to fall to 2.1-to-1 from the 2.8-to-1 ratio of 2015. That means the payroll tax flowing into the system isn’t enough to cover the benefits being paid out.
Calculator: How much will I need to save for retirement?
According to the Social Security and Medicare Board of Trustees Report from 2015, the Social Security Trust is expected to exhaust its cash reserves by 2034. The good news is that the program is not — I repeat, not — going bankrupt, so it will be there to provide you benefits, assuming you’ve earned the minimum of 40 lifetime work credits required to qualify. However, without any excess cash, Social Security will only be able to pay out benefits on a budget-neutral basis. This could mean a cut in benefits of up to 21%.
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This benefit cut is a serious concern, as Gallup’s 2015 poll showed that 59% of retired seniors count on Social Security as a major source of income. A recent survey from the Insured Retirement Institute also showed that 59% of baby boomers were counting on Social Security to become a major source of income in retirement.
The Social Security Administration has noted previously that benefits are only designed to replace about 40% of a retired worker’s wages, meaning Americans need other sources of income if they’re to be on financially stable ground come retirement. This could mean working longer than originally expected in order to save more money.
2. Medical inflation is handily outpacing the CPI
A second reason you’ll probably choose to retire later than the current average of 63 years is the rising cost of medical care. With the exception of 2008, healthcare inflation has surpassed the Consumer Price Index in every year since 2005. Inflation rates for branded and specialty pharmaceuticals have been even especially high, regularly pushing into the high single digits on an annual basis. In plainer terms, American consumers will have to adjust their retirement savings to account for loftier medical expenses.
Most seniors eagerly await turning 65 so they can officially enroll in Medicare, which studies have shown to be cheaper than individual health plans offered by private insurers. However, a growing number of prescription medicines that are administered on an outpatient basis (for example, cancer immunotherapy injections) have six-digit annual costs. Given that outpatient services fall under Part B, seniors could be responsible for 20% of the total costs of these drugs. And remember: Medicare has no out-of-pocket annual limit.
One solution elderly Americans may consider is working longer so they can be covered by employer-sponsored health insurance. While Medicare is cheaper than individual private insurance health plans, an employer-sponsored plan could save seniors even more money, enticing them to work longer.
3. You’re not saving enough
The heart of the reason why consumers are working longer is their lack of savings. St. Louis Federal Reserve data from April 2016 shows that the U.S. personal savings rate is just 5.4%. This is higher than where we were before the Great Recession, but U.S. savers are still lagging other developed countries badly. It means Americans have to do even more with what little they’ve saved.
A recently released report from GOBankingRates shows that a frightening 1 in 3 Americans hasn’t put a single cent toward their retirement, and another 23% have less than $10,000 saved. Just 26% of those surveyed had $100,000 or more in retirement savings — and even that amount isn’t enough to provide financial security in retirement.
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The main problem here is that consumers lack financial discipline. A Gallup poll from three years prior observed that only 32% of American households kept a detailed monthly budget. Without a budget, it’s difficult to have a full understanding of your cash flow. Therefore we’d all do well to use budgeting software to develop a plan for saving money on a regular basis.
Of course, there’s more to saving than just plugging numbers into spreadsheet. You need to have a specific and measurable plan that you can stick to, as well as support from like-minded people (preferably those within your household). It’s also a smart idea to have what you’ve saved transferred to a savings or investment account regularly so as to prevent it from being unwisely spent, as well as to keep you accountable for your spending habits.
4. You’re not investing wisely
Another reason many Americans will retire well after age 63 is that they’re making poor investing decisions.
Over the long term, the stock market has been proven to be a great source of wealth creation. Including dividend reinvestment, the stock market has gained an average of about 10% per year since the 1920s. As an example, if someone had purchased a fund tracking the S&P 500 index at the end of 1993 and held on for 20 years, through both the dot-com bubble burst and the Great Recession, they still would have netted a 483% return.
Despite the overwhelmingly favorable long-term data backing up the stock market, just 48% of Americans surveyed by Bankrate in 2015 said they had money invested in the stock market. It’s no surprise to see the American consumer flocking to the safety of CDs and bonds following the market meltdown eight years ago, but they may not realize that these investments aren’t even keeping up with inflation, which means they’re losing real buying power. Their CD might return 0.5%, but the inflation rate is 1.5% annually or higher, causing their long-term purchasing power to shrink.
In this instance, the solution would be to get back into the stock market. If you don’t feel comfortable buying individual stocks, consider buying exchange-traded funds (ETFs), which are baskets of funds that represent certain sectors, industries, growth rates, regions of the world, or even market caps. There really is something for everyone in the stock market.
5. People are living longer than ever
Finally, you’ll probably retire later than previous generations because you’re going to live longer. Improvements in health education, access to medical care, and pharmaceutical products have pushed the average life expectancy in the U.S. from roughly 70 years in the mid-1960s to nearly 79 years today, per the Centers for Disease Control and Prevention. It is assumed that life expectancies will only continue to climb higher from here.
If you’re living longer, the you’ll need your nest egg to last longer, too. This means raising your retirement number and creating a withdrawal plan detailing how you’ll access your savings during retirement. Not having a withdrawal plan could be a critical mistake, because you might withdraw your money too quickly and exhaust your nest egg or wind up paying more than you expect in taxes come retirement because you didn’t take into account the federal and state tax implications of your withdrawals.
For example, single retirees who’ve filed for Social Security benefits and earn more than $25,000 annually would have at least half of their Social Security benefits exposed to federal taxes. For couples, the income threshold is $32,000 and higher.
Long story short, you’ll want to have a withdrawal plan firmly in place before retiring.
Are your ducks in a row, or you will you be retiring later than age 63? Share your thoughts below.
Sean Williams has no material interest in any companies mentioned in this article.
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