Paying for Retirement: What They Don’t Tell You
Advice that sounds good often isn’t good enough
There is no shortage of retirement planning tips and strategies that, on face value, make great sense. But all too often the advice is incomplete, the suggested implementation is flawed, or the strategy is based on a risky underlying premise.
Here are five popular retirement strategies where a very good idea doesn’t quite go far enough.
“We auto-enroll you in the workplace retirement plan, so you’re set.”
Over the past 15 years, many workplace retirement plans have automatically enrolled new employees in the 401(k), to get workers over the biggest hurdle: starting to save for retirement. That’s fantastic.
What they don’t tell you: “We auto-enroll you at too low of a rate.” Many plans choose an initial contribution rate for the new employee that is way below the 10% to 15% of salary that experts recommend as being crucial to landing in retirement with enough savings. And many plans lack a feature that automatically raises the too-low savings rate once a year.
“Our workplace retirement plan includes a nice matching contribution.”
After health insurance, a workplace retirement plan is the most valued employee benefit. In the recruiting pitch, HR and hiring managers love to point out the added bonus of a fantastic employer matching contribution.
What they don’t tell you: “Hey, if you rely on us to auto-enroll you, chances are we’ll start you at a contribution rate that ensures you don’t qualify for our maximum match.” Employers are free to draw up their own formula for how they dole out a matching contribution, and there are dozens of different formulas in play. One of the more common formulas is to offer a 50% match for an employee who contributes 6% of their pay into their retirement account. That is, if you send 6% of your pay into your retirement account, your employer will kick in another 3%.
According to T. Rowe Price, less than 40% of plans that auto-enroll workers set an initial deferral rate of at least 6%. That suggests plenty of workers are being set up to leave money on the table.
Moreover, Vanguard’s annual report on workplace retirement plans it administers says that 20% of plans (which cover nearly one-third of all participants in Vanguard-administered plans) have to wait one year before they are eligible for the matching contribution. Spend four years at a job and you only get three years of a match.
“A retired couple will need around $300,000 to cover healthcare costs.”
What they don’t tell you, Part 1. “That’s an estimate of total costs over a retirement that we’re figuring will last at least 25 years.” The number sounds so big, it’s impossible for many to plan for. But break it down into an annual or monthly healthcare cost in retirement and it’s not nearly as scary.
What they don’t tell you, Part II. “Um, long-term care is an additional cost.” Any type of long-term care — it can be care you receive at home — is not included in the cost estimates that grab headlines. A clear-eyed understanding of the probability you will need long-term care during retirement, and for how long, is one of the most crucial pieces of a solid retirement plan that should be more front and center when discussing healthcare costs.
“Working longer is a smart way to stretch your retirement dollars.”
What they don’t tell you: “Good luck staying at your career job.” About half of people at least 50 years old will be laid off at least once, and it is rare that the next job will match their prior earnings. That can make it hard (or impossible) to keep saving at the rate you should, and often leads to using retirement savings earlier than planned.
Moreover, studies show that illness or a need to step in as a family caregiver causes many people to stop working earlier than they planned. A retirement plan that requires holding on to a high-paying job through your 60s is risky.
“Sure, you can stay put in retirement.”
What they don’t say: “Aging-in-place can be a financial mess for you and your kids (and grandkids).” Making clear-eyed decisions in your 60s about what will work best for an older you can have a profound financial impact on your entire family. It can also help you avoid social isolation as you age.
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