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Retirement can last 30 years or longer today given longer lifespans. This requires accumulating more assets than many realize, especially considering the impact of inflation and possible changes to future needs, living expenses and your health.

Based on studies conducted by the Center for Retirement Readiness (CRR) at Boston College, 47 percent of today’s working households are at risk – 19 percent know this, but 28 percent don’t. Inadequate retirement preparedness is a widespread problem in both higher income and lower income households. The 28 percent of households who erroneously assume they are prepared are unaware they will come up short, and should carefully assess and understand their retirement income needs.

So why are so many NOT prepared? Several misconceptions have led to overconfidence about retirement readiness.

Households with High Housing Debt-to-Asset Ratios

Rising home values over the past decade and more has led some homeowners to overlook their level of mortgage debt, especially in high-income households living in more expensive homes. According to the CRR, a homeowner should analyze the debt/equity ratio and the net sales profit on his/her residence. For example, if your home’s market value = $750,000 and you carry a $500,000 mortgage, your ratio = 67%. Any ratio over 50% means you owe more on the house than you would receive from selling it. The $250,000 net sales gain, less the costs of selling (broker commissions, taxes, and other fees) reduce the value of the actual value of your home. Not understanding this can lead to overconfidence about your overall net worth.

Workplace Retirement Plans with Low Balances

Workplace retirement savings plans (e.g., 401(k); 403(b); etc.) may create an illusion of wealth. Having $100,000 a company retirement plan may appear to be a lot of money to some, but it will only provide a small amount of monthly retirement income. This fact, along with not understanding how much (how little) Social Security benefits may cover your expenses, can lead to another overconfidence risk factor. For high earning households, Social Security will replace a lower share of pre-retirement income.

To best understand this, calculate your potential withdrawal rate (the amount you will withdraw each year), perhaps 3 to 5%. If you withdraw 4% the first year and continue to withdraw 4% adjusted for inflation over 30 years, your $100,000 retirement plan will only generate about $333 per month.

One Retirement Saver in a Household with Two Earners

Many working couples may not realize they need to replace both incomes to maintain their standard of living in retirement. If only one partner saves for retirement, these households may not be realistic about their retirement outlook. A financial planner can create cash flow and retirement projections now to help you understand whether or not you need to save more. Reviewing these projections will provide insight into the impact of saving more now – and/or help you understand that you may need to reduce your standard of living in retirement.

Many people only contribute the minimum percentage of salary to their employer plan to receive an employer matching contribution, perhaps 2 to 5 percent. However, many employees do not understand they can contribute much more each year. In 2023, for example, one may contribute $22,500 if under age 50 and $30,000 if age 50 or older to a 401(k) plan. Try to maximize the amount you save for retirement every year. Learn about the IRS limits for saving in various types of retirement plans, such as Traditional IRAs, Roth IRAs, and employer plans. Note that the IRS limits are higher once you are age 50 and older, and keep track of changes in the limits each year.

Take the time to determine whether or not you are on a realistic track for your retirement. Do not assume that your nest egg will be enough or that Social Security will cover the gaps. Consider what may change in your later years, including the impact of declining health, and consider whether you will be able to retire and continue living with your current standard of living.

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Best regards,

Janet Rhodes Friedman, CFP®, CDFA®, MBA Janet@PlanWithFPS.com


Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.

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