Myths vs Reality

Your house is one of your biggest investments, and many people rely on using the equity in their home to fund their retirement. However, there are many factors that could prevent your home from providing a comfortable retirement income.

What if:

• You still have a mortgage when you retire?
• Your house’s value declines before you retire?
• You can’t sell your home?
• You can’t afford to move?
• Your home equity is already tapped out?

In recent years, home values declined by as much as 20%.² Can you afford such a large loss right before retirement? Don’t find yourself in a situation where your house value compromises the quality of your retirement.

You may find your expenses increase during the first few years of your retirement because you have more time to enjoy the things you weren’t able to do while you were working. This includes travel, leisure activities, and large purchases, such as a second home, RV or a boat.

People also assume they will be in a lower tax bracket during retirement. This may not be true, depending on the investments you choose. If all your income is in taxable accounts, 100% of it could be taxed in retirement. This means you could remain in the same tax bracket or potentially a higher one. Establishing a well-rounded financial strategy that accounts for several retirement scenarios will help you prepare for these possible expenses.

If you work for a company that provides a pension, it will likely compose a smaller percentage of your retirement income than you might think.

Pension plans are disappearing³

Over the past few decades, ....the number of Fortune 100 Companies offering traditional defined benefit plans has decreased from 64 companies in 1998 to just 2 in 2016.³ In addition, most pension benefits aren’t adjusted for inflation.

What does this mean for you? You shouldn’t count on a pension providing substantial retirement income, plan to have other sources of income available that keep pace with inflation over the course of your retirement to help compensate for any potential gaps.

Some retirees believe that Social Security will be sufficient to cover their expenses. Yet according to the Social Security Administration, it provides only 34% of the total income of Americans aged 65 and older. The other 66% of retirement income sources include 401(k)s, annuities, permanent life insurance, pensions, employment and other savings.4 So it’s critical that you understand your future Social Security benefits and plan for additional sources of income. 

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How are Social Security benefits calculated?

Social Security benefits are based on lifetime earnings and are calculated on the 35 years an individual earned the highest income. These earnings will determine the amount of money received every month at full retirement age. Many people don’t realize that the age you begin taking Social Security benefits impacts the benefit amount collected over your lifetime. The full retirement age for Social Security was 65, but, depending on the person’s year of birth, it can now be as late as 67.

Collecting Social Security earlier than full retirement age can decrease your benefits by as much as 30%.⁴ 

In fact, if you continue working past full retirement age, there is an 8% increase for each year you wait to take your Social Security benefits (up until age 70). You should plan to use other sources of retirement income and delay collecting Social Security for as long as possible to maximize your benefit. 

If you stepped out of the workforce for any reason, or you worked fewer than 35 years, your Social Security benefit will be affected. Lower-earning years may be factored into your benefit calculation as part of the 35-year total.

In addition, women generally average 27 years in the workforce because they stop working to raise children and/or care for elderly parents. In this case, the eight additional years needed to reach 35 total years would be counted as zero and averaged into the benefit calculation, adversely affecting your monthly benefit. In some instances, significantly lower income years may also need to be included in the 35-year average, such as your college or high school jobs.

Retirees often believe that Medicare covers all medical costs, but the reality is that it only covers basic healthcare expenses. Out-of-pocket expenses such as non-covered healthcare premiums, co-pays, and other expenditures for vision, hearing and dental can add up. Estimates for out-of-pocket costs for people in good health average $7,620 per year.⁶ It is estimated that an average, healthy 65-year-old couple will need $321,994 to pay for healthcare costs in addition to long-term care costs during retirement.⁷ This is a considerable amount of money to fund. Factor in these additional medical expenses when planning to cover the costs of your retirement, since Medicare does not provide complete healthcare coverage. Many people also miscalculate their need for long-term care. Almost 70% of people turning 65 can expect to use some form of long-term care services and support in their remaining years.⁸ The cost of nursing home care is expensive and is likely to increase. National average rates for a private room in a nursing home are $83,580 annually as of 2017 and $39,516 for a one-bedroom in assisted living.⁸

A staggering 20% of today’s 65 year old’s will need long-term care for longer than 5 years.⁹

This is a considerable amount of money to fund. Factor in these additional medical expenses when planning to cover the costs of your retirement, since Medicare does not provide complete healthcare coverage. 

Many times, people don’t think they need life insurance as part of their retirement plan, especially if they are single, have grown children or little or no home mortgage. But the reality is that permanent life insurance provides both protection and possibilities through cash value which plays an important role in a sound financial plan and can also help address key retirement needs.

Often, people don’t live their life to the fullest in retirement in order to leave something for the children and grandchildren. So instead of spending down their annuities, etc., they save those assets in order to leave a legacy. What many people don’t realize is that using the death benefit of their life insurance can be a more tax-efficient way to leave money to their heirs while still enjoying retirement.

The cash value of a permanent life insurance policy can provide a variety of retirement possibilities like supplementing your other retirement income, taking an extended trip, buying a vacation home or paying for unexpected medical costs. Your financial professional can help you create a plan for effectively using the cash value of your life insurance based on your needs and goals. For example, you can maximize your Social Security benefits by using the cash value to bridge the income gap until you start taking Social Security.

Talk to a financial professional about strengthening your retirement plan with the death benefit protection, cash value and legacy features of permanent life insurance.