Americans are healthier and living longer; 70 is often called the new 65. For retirement, 70 just may be the new 60.
A survey by Willis Towers Watson — a global multinational risk management, insurance brokerage and advisory company — found that nearly a quarter of Americans say they will likely work into their 70s. That figure has gone up 5 percent since 2005 — one-third claim they will work longer and retire later than they had originally planned. The same survey found that over the past two decades, the percentage of United States men ages 65 and up who are still working has gone from 15 to 22 percent.
Retirement is thus coming later and lasting longer. As a result of increased life expectancy, the average length of retirement for someone at age 65 has nearly doubled from what is was in 1970, according to the National Center for Health Statistics.
But the prospect of a longer retirement is not necessarily all rosy. With it can come concerns over changing health care needs and financial pressures. People are asking, “Will I be healthy enough, and will I have the financial resources to enjoy retirement?” Simply put, retirees worry about outliving their money.
Alarmingly, about 25 percent of Americans ages 50 and up, according to a survey by the Associated Press-NORC Center for Public Affairs Research, say they never plan to retire. The number one reason: financial needs.
Financial pressures are often cited as reasons for putting off retirement, and the Willis Towers Watson survey found that those who plan to work into their 70s have more stress, poorer health and fear a reduced standard of living if and when they do retire. Of those who say they plan to work into their 70s, a large percentage do not because of poor health, forced layoffs or retirement and having to take care of a spouse or parent.
So how do people plan for a retirement that could last 20 to 30 years? How do they ensure they won’t run out of money when saving is increasingly difficult in an environment of rising healthcare premiums, flat pay increases and disappearing pensions? Surveys continue to show that a large number of Americans are not saving enough for retirement, or not even saving at all.
Financial planners say that understanding where your money will come from is basic to begin to plan for a successful and financially-secure retirement.
For years, retirement income came from two basic sources: Social Security and pensions.
Social Security, the federal government retirement program, continues to be the floor for retirement income. But retirees should not expect that Social Security will provide adequate income, especially if they begin taking benefits early. At age 62, the average monthly payment is only $1,340. Delaying until older means a larger retirement check. According to the Social Security Administration, benefits jump about 8 percent per year for those born in 1943 or later for each year they delay taking benefits. But benefits do max out, so potential retirees should consult the Social Security Administration.
Of course, part of Social Security is Medicare — the federal healthcare plan for seniors.
Defined Benefit Plan
In the past, many workers relied on a company pension plan for retirement, in which a former employee’s payments were calculated according to length of service and the salary they earned at the time of retirement. Contributions to the plan came from the company and not from the employee’s paycheck, but this is largely no longer the case. Fewer and fewer workers have a pension that they will be able to count on in retirement. Most employers have replaced the Defined Benefit Plan with the Defined Contribution Plan that requires employees to put their own money in to receive a company match.
Realizing that people need to save more for retirement to supplement their Social Security payments, the government has created a number of optional and tax-advantaged Defined Contribution Plans.
Individual Retirement Account
An IRA is an investment account designed to help individuals save for retirement. IRAs, which generally have tax advantages, come in different forms, but there are two distinct types — traditional IRAs and Roth IRAs.
Anyone earning an income younger than 70.5 can open an IRA through an investment house or brokerage. Money in an IRA can be invested in a host of ways, including a range of stocks, bonds, mutual funds and other types of equities. Contributions to a traditional IRA may be tax-deductible, depending on whether an individual has another retirement account through their work.
Investments in an IRA grow tax-deferred — the account is not taxed as long as the money is held inside the account. Once an individual takes the money out, otherwise known as taking distributions, they pay taxes on the contributions and earnings. The idea is that in retirement, income will be lower, so the taxes will be less significant than what would be paid during working years. Also, because the principle will remain untouched by annual taxes, there is more money there to grow proportionally and accumulate more interest than if it were whittled by taxation each year.
Money can be withdrawn from an IRA at any time, but if it is taken out before retirement age (currently at least age 59.5), the individual not only pays taxes but also could face a 10 percent early withdrawal penalty. Minimum distributions must be taken from an IRA account at age 70.5.
There are limits to how much money can be put into your IRA each year. These limits change over time, adjusting every year or two with inflation. Additional catch-up contributions, available to investors age 50 or older, are designed to accelerate savings growth in the pre-retirement years.
Unlike a regular IRA, Roth IRA contributions are made after tax, but any money generated within the Roth is never taxed again. Withdrawals can be made from a Roth IRA before retirement age without penalty. Financial planners say contributing to a Roth can be a great place to invest extra cash.
401(k)s are the workplace retirement accounts that have largely replaced pension plans. Workers contribute a portion of their pre-tax paycheck in a tax-deferred investment account. Many employers match employee contributions up to a certain percentage of amount. Just as with a traditional IRA, contributing pre-tax money lowers the amount of income tax workers pay on their salary. Gains also grow tax deferred until retirement. Withdrawing funds from the plan before retirement age, however, can result in payment of a penalty and be subject to federal and maybe even state income taxes.
Some employers offer 401(k) loans, and other employers will contribute a base percentage of salary to a 401(k), even if the employee does not contribute, but the employee must sign up for the plan. Workers who are not signed up and contribute up to the company match may be ignoring a significant source of retirement income.
Variations on this type of account include the 403(b), offered to educators and nonprofit workers, and a 457(b), offered to government employees.
A sole proprietor can set up an individual or one participant 401(k) and make contributions as both employee and employer up to specified amounts.
A Roth 401(k) combines features of the Roth IRA. This type of account is offered through employers (not all offer them), but the contributions come from a worker’s after-tax paycheck instead of the pre-tax salary. If certain regulations are met, contributions and earnings in a Roth are never taxed again.
The Savings Incentive Match Plan for Employees IRA is a retirement plan offered by small companies. The SIMPLE IRA works very much like a 401(k). Contributions are made from the pre-tax paycheck and the money grows tax-deferred until retirement.
The Simplified Employee Pension, or SEP, is designed for the self-employed and may also be used by some small business owners. A SEP IRA allows an individual to contribute a portion of their income to their own retirement account, and fully deduct it from their income taxes. The maximum annual contribution limits are higher than most other tax-favored retirement accounts. If the business has employees, the employer must contribute for all who meet certain requirements.
With today’s mobile workforce, many people may wind up with a variety of retirement plans. A Rollover IRA allows an individual to consolidate 401(k) accounts from former employers. Individuals can also convert an existing 401(k) or IRA into a Roth IRA, pay the tax today and never pay it again.
Health Savings Account
Individuals with certain high-deductible health insurance plans can save money tax-free in a Health Savings Account. Contributions can be made up to a specified amount a year for an individual or a family. Those 55 and older can contribute even more. That money can then be withdrawn to pay allowable medical expenses, including copays and items such as eyeglasses. If the money isn’t spent, it rolls over indefinitely. At age 65, the money can be withdrawn for any reason without penalty, but income taxes must be paid. Or, the money can be used for retiree medical expenses tax-free. Before age 65, money withdrawn for any reason besides medical expenses is taxed and generates a 20 percent penalty. But as long as an individual saves receipts, the money can be withdrawn to reimburse for expenses paid years ago. If the money isn’t needed for medical expenses, it can be invested as any other retirement savings.
For some, retirement is a chance to take a risk, do something they love and earn an income at the same time: a retirement job. More and more retirement individuals are going back to school, either to brush up on their skills or learn new ones, and then creating their own jobs, working when and where and how much they want. But this scenario generally only works as part of an overall retirement plan, few retirees are likely to make sufficient income to fully support them and their families.
Financial planners say the key to a successful, financially secure retirement is in the planning. Those looking toward retirement need to take the planner’s maxim to heart: Fail to plan — plan to fail. And most importantly, do the homework and get advice when needed.