Most women in the USA are afraid they’ll end up a bag lady (homeless and destitute) in old age.
A recent survey of women, across all economic classes, revealed that 76% of all middle-aged women fear becoming destitute in retirement.
Because we don’t know how to deal with several key variables that can help us plan for a long and prosperous retirement.
But, we can make a plan that protects us from poverty – if we don’t make some very common errors like:
Counting on Working Past Your Typical Retirement Age
Conventional wisdom says you can always earn more income. Most professionals don’t have mandatory retirement ages and the service based economy is always looking for people eager to work (at low wages) during surges.
So why wouldn’t you plan to keep working or return to the paid workforce as you age?
Health problems are the biggest reason.
Every survey done over the last few decades has shown that fewer than half the people who planned to continue working past typical retirement ages actually do continue to work. Even fewer keep their high paid professional level jobs.
Companies continue to downsize and merge and older, more expensive workers get laid off first (one of the joys of no union protections). Agism in the workplace is real – just ask any 58 year old woman who has had to look for a new job recently.
The average age of retirement for women in the United States is still 62 years old. Filing for your Social Security benefits at 62 will reduce your monthly benefits for the rest of your life by 25%.
So, if you’ve earned a $2,000 benefit at full retirement age (typically about 66 ½ for baby boomers), expect to collect only $1500 starting at age 62.
In addition, you’re not eligible for medicare until age 65 so you’ll need to buy your own policy. Thanks to the Affordable Care Act, at least you can get health insurance but it will still eat up $400 – $500 or more of your monthly income (and you should factor in a minimum 3% cost increase each year).
Also, remember that most medicare participants need a supplemental (Medigap) policy to cover some standard costs excluded by Medicare.
Another big mistake is:
Underestimating Your Income Replacement Ratio (IRR) for Retirement
Many planners promote using a 70% – 80% income replacement goal.
This is based on dated statistics. Unless you plan to retire like your parents did including:
- No Mortgage,
- No Credit Card or Consumer Debt,
- No Dependent Children (or those who depend on your unofficial financial assistance),
- Reduced Travel and Entertainment Expenses, and
- Employer Paid Health Insurance,
you’re going to need to replace all your pre-tax income less your retirement savings and your employment taxes. That means 80% is definitely the low end of your IRR and 90% or more is safer.
The best way to reduce your income needs in retirement is to save a large percentage of your current income. If you save 30% and have an employment tax rate of 15%, you’re living on only 55% of your current income. If that describes you now (or you reduce your expenses before retirement to a smaller percentage of your income), you could realistically plan on replacing only 60% – 70% of your earned income during retirement.
Remember too, you need to budget for rising medical costs, income taxes (that will most likely continue to increase) and your Long-Term or End-of-Life care.
If you’d like to start with a realistic Income Replacement Ratio, click on the following link and work through the ratio calculations in my Money Diva special report: Your Fabulous Retirement… Step #1