If you know anyone who lived through the Great Depression, you’ve probably seen that they have different financial fears and habits than people born in later generations. Once you live through a financial disaster like the Depression, it is likely to shape your attitude and influence your decisions about money for the rest of your life. While our most recent recession by most accounts was less severe than the Great Depression, it was still the biggest financial calamity that most of us have ever seen, and it’s not over yet.
One of the groups most affected by this most recent recession are those within five years of retirement. It has affected those who have a goal of retiring soon as well as those who have retired recently. As a result, the way people view retirement will be very different than it has been viewed for the past several years and the lessons we’ve learned will stick with us long after the economy has fully recovered. Here are some characteristics of the new reality of retirement.
You May Have To Keep Working: The dream of retiring at 50 and spending the next 40 years living off your wealth is a nice one, but it’s not the reality for most people. A growing number of retirees are keeping at least a part time job if for no other reason that to have access to health benefits, one of the biggest costs during retirement. A recent AARP study shows that retirees spend an average of 30% of their income on costs related to healthcare. Working longer can buy you time because every dollar of income earned is a dollar that is not withdrawn from retirement accounts.
You May Live Longer Than You Think: Longevity risk is real and few things are scarier than the notion of running out of money when you’re too old to rebuild financially. Over the past 50 years, the average life expectancy for a 65 year old has increased from 78.9 years old to 83.7 years old. This means more money will need to be saved to fully fund your retirement and you’ll probably spend more on healthcare later in life than you have budgeted for.
Luck Matters: You may have been told as the stock market was plummeting last year to “hang in there” because the market always comes back. It’s true, at least historically, that the market has always come back. But if you lose 50% of your retirement savings in the year or two on either side of your retirement, you may never recover without a substantial downgrade in your lifestyle. Having some sort of guaranteed income source, either through a pension related to your career or through insuring your retirement income stream with an annuity, is one way to make bad luck much less of a potential pitfall for your retirement savings.
You’re Never too Old to Budget: Regardless of your financial position as you prepare for retirement, it’s important to have a plan in place for your spending during your retirement years. Too many people enter retirement with their fingers crossed hoping they don’t spend all their money too fast. Most studies show that if you’re spending more than 4% of your retirement assets each year during retirement, you are running a substantial risk of running out of money. No matter your age, it’s vital to train yourself to stick to a budget.
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Posted December 12, 2009 by Admin under Financial News