5 Financial Downsides to Retirement

retirement

Retirement sounds terrific. You finally get to take a break. You’ve worked all of your life for this. However, is it really all that it’s cracked up to be? There are many downsides to retirement that people don’t always talk about. In fact, there are some big financial downsides to retirement. It’s important to be aware of those before you retire. Here are the five biggest retirement problems:

1. Inflation Keeps Rising

The number one financial problem that people face in retirement is inflation. The cost of living just keeps going up. It doesn’t matter to the world that you’re getting older and living on what may be a fixed income. The price of milk and utilities will just keep increasing.

LIMRA reports that retirees suffer from the effects of inflation even when inflation rates are relatively low. They demonstrate that just a 2% annual inflation rate could cause the average retiree to lose nearly $74,000 within a 20-year retirement period. If you haven’t accounted for inflation when planning for retirement then you could end up financial trouble.

2. Retirees Pay a Lot in Taxes

Many people assume that they’re taxes will go down in retirement. After all, you’re not working as much, so you’re not going to earn as much, right? Wrong. Many people actually earn as much or more after retiring, especially if they planned ahead financially for secure retirement.

Unfortunately, that means that you have to keep paying taxes. You don’t have an employer taking those taxes directly out of your paycheck anymore. Therefore, you’re going to have to deal with that yourself. Moreover, remember that your 401(k) money, which wasn’t taxed when you set aside, is taxable income when you use it in retirement.

3. You Have to Make the Money Last

Here’s the obvious but important thing about retirement: you’re spending money and not earning any. Ideally, you’ve created some kind of passive income to help you bring some money in during retirement. Mostly, though, people retire and use what they have in savings. People are living longer and longer after retiring. The longer you live, the more you have to make that money stretch. Therefore, you might want to think twice about retiring early.

4. Old Age Is Expensive

Not only do you have to make your money last. Not only do you have to consider the problem of inflation. But you have to think really seriously about what life is going to cost you after retirement, particularly as you get older and older. So many costs go up as you age. Your healthcare needs rise. You may begin to need help through in-home care or assisted living.

These costs are not cheap. MSN News reports that an average 65-year old couple requires more than one quarter of a million dollars for healthcare costs alone. A private nursing home costs more than $100,000 per year. When you’re young, you really can’t fully imagine just how expensive it is to get old. Once you’re in retirement those costs can become a very harsh reality.

5. You May Have To Keep On Working

Social security alone isn’t likely to support you. Your own savings and investments might not be enough to cover these costs. Therefore, you may have to keep on working. I personally know many people who retired from their long-term full-time jobs only to have to secure new employment a few years after retirement. Therefore, retirement may simply not be what you expect.

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Want to Become a 401(K) Millionaire? More and More People Are Doing It.

401(K) Millionaire

Becoming a 401(K) millionaire is possible. It’s not necessarily easy. However, more and more people are succeeding.

What is a 401(K) Millionaire?

If you’ve never heard of the time before then you might wonder exactly what it means to be a 401(K) millionaire. It isn’t complicated. In fact, it’s exactly as the name suggests. A 401(K) millionaire is someone who has at least $1 million in their retirement account.

The Number of 401(K) Millionaires Is on the Rise

According to CNBC, the number of 401(K) millionaires increased by 35% in the first quarter of 2019 (as compared to the previous year). The main reason for this is because of the large number of baby boomers who are hitting that seven figure mark. The average 401(K) millionaire is 60 years old.

How to Become a 401(K) Millionaire

If you want to become a 401(K) millionaire then you have to get a grip on your money immediately. The younger you are when you start setting that money aside, the more likely it is you’ll reach that seven figure retirement target. That said, here are some key tips that anyone can use to increase their 401(k) savings.

Max Out Your Contributions

The most important thing that you can do is to contribute as much as you’re allowed to contribute to your 401(k). Your allowed employee contribution amount changes from year to year. In 2019, you can contribute $19,000.

However, if you’re over the age of 50, then you’re allowed to contribute a little bit more so that you can “catch up.” In 2019, you’re allowed to contribute $6000 extra.

Remember that the numbers tend to increase every year so always check what the latest possibilities are.

Moreover, make sure that you’re maximizing employer contributions. Take advantage of any options you have at work for your employer to contribute up to the maximum amount. In 2019, the maximum employer contribution is $37,000. Go talk to HR today.

Make Smart Investments

When investing your money, it’s important to consider your age and how long it will be before you retire. If you’re young, then invest in equity-based mutual funds. They offer higher risk but bigger reward. Hang on through the ups and downs.

However, as you get older and approach retirement age, it’s time to switch to more conservative investments. That’s when you want to put more money into cash and bonds.

One smart option is to invest your 401(k) money into a target-date fund. You set the target retirement date. Then professionals manage your investments for you with that goal in mind. They’ll follow the same rules as above (riskier investments early on and more conservative ones later) so that you don’t have to worry about the details so much.

Don’t Count Yourself Out

You don’t have to be rich in order to become a 401(K) millionaire. Although it’s best if you start young, don’t count yourself out if you’re older. Even if you don’t reach that seven figure target, aiming to do so can help you maximize your retirement income.

Know What You Need to Save To Become a Retired Millionaire

Use a millionaire calculator in order to get a realistic picture of what it would take for you to have $1 million or more at retirement. You’ll enter:

  • Current age
  • Target retirement age
  • Amount currently invested
  • Savings per month
  • Expected rate of return
  • Expected inflation rate

This gives you your expected savings at retirement. However, you can play around with the “savings per month” number until your expected savings reaches $1 million. Then you know how much you need to save to reach that million mark. While this doesn’t specifically determine your 401(k) amount, it gives you a good idea of how much other savings you’ll have to add to your 401(k) to become a millionaire at retirement.

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Want to Retire Early? Be Aware of These 5 Financial Risks.

early retirement

Many people want to take early retirement. If you’ve saved up enough money then why not? Well, first of all, you have to be sure that you’ve saved up enough money. Many people think that they have planned accordingly only to realize that there are a lot of financial downsides to early retirement.

Here are five of the biggest money problems that people tend to face in early retirement:

1. Failing to Plan Properly for Taxes

Did you know that many people are in a higher tax bracket at retirement than for much of their working career? This means that you’re likely to owe more at tax time than you’re accustomed to. Moreover, once you start taking out your 401K money, you’ll have to pay taxes on that.

Therefore, taxes in retirement can be pricey. If you haven’t planned ahead, then you’re going to have to readjust for that reality. If you retire early, then you’ll have to start figuring that out years ahead of your peers.

2. Years and Years of Spending Ahead

That brings us to the next key point. If you retire early then chances are that you’ll have more years of retirement. Therefore, you’ll have to make your retirement income stretch. If you retire at 55 instead of 65, that’s ten less years of earning and ten more years relying on retirement income.

3. Where Will Your Money Come From?

You won’t even be able to access some of your retirement funds, such as your 401K, until you hit a certain age. Therefore, you’ll have to figure out where you’re money is going to come from prior to that. If you haven’t planned in advance, then you can easily find yourself overspending in those early years. If you tap into your savings or refinance your home to cover those costs then you’ll have to find some way to make up for it later.

4. What About Healthcare?

Just because you retire early doesn’t mean that you can access Medicaid early. Therefore, you’re going to have to figure out how to pay for health insurance until you reach regular retirement age. If you’re not working anymore then you can’t count on employer rates. Your health insurance could get very expensive very quickly.

Even though you’ve retired early, you’re old enough that you can’t risk going without healthcare. If anything were to happen, your care costs would be exorbitant. Therefore, you do have to pay out of pocket for health insurance. How are you planning to do that if you’ve retired early?

5. You Don’t Maximize Your Retirement Benefits

If you take early retirement then you may not make as much money post-retirement as you could have. For example, if you have a job that pays a pension, the pension amount might be significantly lower if you retire early. Likewise, if you start access Social Security early (“early” currently means age 62) then you won’t get as much as if you’d waited. So, you start using the money sooner and yet you’re getting less of it than you could have. Waiting to retire could be well worth it.

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