5 Reasons You Might Be Wrong about Your Retirement Readiness

 In Retirement

retirement readiness

You’ve saved for decades at this point, putting as much as you thought feasible toward your retirement. You’re ready – you’re prepared for the day that you can finally step back from that full-time job and do the things you enjoy.

On paper, it sounds great, but you might not actually be ready.

According to a report from the Center for Retirement Research at Boston College, many households do not have an accurate idea of their retirement readiness.

The report points out that while 35% of Americans have an idea of how much they’ll earn during retirement, less than half of all Americans have any idea of how much they have saved for retirement.

Here are five reasons that you might be wrong in assuming you’re prepared for retirement.

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Your Retirement Readiness Is Skewed Because You Underestimated Your Lifespan

One of the keys to successful retirement readiness is making sure that you’ll have access to money until the end of your life.

Of course, no one knows exactly how long they’re going to live, so many people choose to estimate their lifespan based on that of their family members, particularly their parents, aunts and uncles.

The problem here is that people today are living longer than ever before. Even a single generation’s difference could add 10 or even 20 years to your life.

While that’s good news for avoiding an early demise, it’s bad news if you’re using a lower life expectancy to estimate the amount you’ll need to save for retirement.

You Think Your 401(k) Will Last

One of the reasons that people fail in terms of retirement readiness is that they think that because there’s a lot of cash in their 401(k) account, they’re set to enjoy the same standard of living in retirement that they do now.

Sure, your 401(k) might have several hundred thousand dollars in it, and, yes, that’s a sizeable amount. However, what you really need to consider is just how small the amounts you’ll have to withdraw from that account are if you want it to last throughout your retirement.

You’ve Earned a Lot of Money for a Long Time

High earners are actually some of those most likely to be last in terms of retirement readiness. This is because the more you earn, the less your Social Security payment in retirement will work to help support your current standard of living.

High earners are often so accustomed to their usual standard of living that they actually have little idea of just how small the payments from Social Security really are.

If you fall into a high-income tax bracket, you are more responsible for saving for your own retirement than someone who earns substantially less, in order to enjoy the same standard of living.

early retirement

You Didn’t Start Saving Soon Enough

Sure, you might be socking away a good chunk of your monthly income to prepare for retirement now, but what if you didn’t start saving until you were older?

A 30-year-old who earned a salary of just $45,000 per year would need to only save 10% of his or her income per month to hit the $1 million mark by retirement age.

However, if you were 50 when you started saving, you’d need to find a way to put away 35% of your monthly income to reach the same goal.

If you started saving later in life, chances are good that your retirement readiness is a lot less than what you think. Now, couple that with the prospect of unexpected expenses, like paying for a child’s college education, and you can see how your financial future might not be as bright as you’d like.

You’re Retiring Early

While quite a few people do still work up until the official age of retirement, a growing number (possibly including yourself) is retiring before they reach the age of 65.

This can have an incredibly devastating impact on your retirement readiness, as it deprives you of several years of savings during a time in your life when you should be earning more than ever.

In line with that, you should be saving more than ever, too. This is your big chance to really make sure that you have that nest egg built, but if you retire early, you lose that opportunity.

How Do You Ensure That You’re Ready for Retirement?

Measuring retirement readiness isn’t all that complicated, but it does require that you dig into your financial situation and estimate your future expenses accurately. You’ll also need to take a second (or third) look at your life expectancy.

If you’re basing your end of life planning on what age your parents passed away, you might be in for a financially bleak future when you surpass that age by 20, 30 or even 40 years.

Start your research with an estimate of what you’ve saved so far. Include all of your savings accounts, including 401(k)s, IRAs and the like.

You should also include any other financial tools you own in that figure, including bonds that will mature around (or after) the time you retire.

Make sure to account for other assets as well – your home, RVs, boats and the like should all be accounted for in your financial planning.

In the end, retirement readiness is a tricky subject, as evidenced by the fact that fewer than 50% of Americans even know what they have put away for their golden years.

You need a solid, actionable plan, the ability to put away as much money as possible for future, and the willingness to use tools like bond ladders that can help ensure an ongoing, reliable stream of income well into retirement.

happy retirement

Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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