I've been saving for retirement since my early 20s. But other than writing out checks to my IRA (or, later on, attempting to max out my 401(k) plan), I never really gave retirement much thought until I started writing about it around seven years ago.
The more general research I did on retirement, though, the more light bulbs went off in my head — to the point where it's driven me to rethink some of my long-term plans. Here are just a few things I didn't realize about retirement at first — but I'm very glad I know now.
1. You may still need most of your income to live comfortably
I'll admit that back in the day, I assumed that retirement was an inexpensive period of life — so much so that you could get by on half of your former income. In doing lots of research, I've learned that that estimate is way off.
You may be able to get by on half of your pre-retirement income as a senior if you're willing to live very frugally or downgrade your lifestyle — or, if you happen to not spend most of your income in the first place. But otherwise, the general convention is that you'll need about 70% to 80% of your former earnings to live comfortably as a senior.
The logic is that some of your expenses might go down when you're older, but not most. And some expenses may increase on you.
For example, you may be able to shed your mortgage payment and commuting costs, which could amount to nice savings. And you also shouldn't have to carve out money for retirement plan contributions since, well, you'll be in retirement.
But on the flipside, healthcare might cost more because medical issues tend to creep up as we age, and because Medicare comes with a lot of out-of-pocket costs. And also, not having a job will mean having to fill your days, and so the mere act of avoiding boredom could get expensive.
2. Social Security may not provide as much income as you'd think
Before I started writing about Social Security, my knowledge of the program was limited. I knew that if you earned a certain amount of money and worked a certain number of years, you'd get a monthly benefit when you were older. I didn't realize how limited that benefit was, though, until I did more reading.
It turns out that Social Security will only replace about 40% of your pre-retirement income if you're an average earner. I used to assume those benefits would offer a higher level of replacement income. Also, if you're a higher earner, Social Security might offer an even lower percentage of replacement income, since there's a maximum monthly benefit the program pays out.
On top of all of this, Social Security may need to cut benefits down the line to compensate for a revenue shortfall. And so if that happens, the replacement income percentages we just talked about could shrink even more.
It's important to be prepared
I'm really glad that I started writing about retirement when I did, because it's given me an opportunity to adjust my financial plans. Now that I realize how expensive retirement might be and how limited my Social Security income might be, I can take steps to adjust.
One such step has been to contribute more money to a retirement savings plan. I've also, over the past few years, ramped up on the investing front in an effort to grow my money.
Even if you don't write about retirement for a living and plan to work for many more years, it's a good idea to read up on the subject and understand the challenges many seniors face. Doing so could prompt you to adjust your own plans — and take steps to avoid financial issues later in life.
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