By: John M. Campanola, Agent New York Life Insurance Company Special to the Boca and Delray newspapers
Planning for retirement is a confusing process for most people. Three out of four older Americans don’t really understand what they need to do to make sure that their nest eggs last through retirement. That’s according to findings from The American College of Financial Services’ RICP® Retirement Income Literacy Survey, a comprehensive survey exploring finances in retirement.
The survey asked 1,244 Americans age 60 to 75 with at least $100,000 in household assets, not including their primary residence, what they knew about protecting their nest eggs. There were serious gaps in their knowledge. Only one in three understood the value of delaying Social Security, for example, and most underestimated the likelihood of eventually needing long-term care. Three in four failed the survey quiz entirely.
Since more knowledge equals better retirement planning, boosting your retirement literacy is key. Here are four areas in which you can improve your retirement savvy:
How long should you work? That’s the big question for most people facing retirement. But only 33% of respondents understood that it’s more effective to work two years longer (deferring Social Security for two years) than it is to increase retirement contributions by 3% for five years prior to retirement. For each year that you defer collecting Social Security, your benefits increase by a certain percentage based on your age.
Fewer than half of survey respondents recognized that a life annuity could help reduce the risk of outliving their savings. Annuities offer a guaranteed stream of income—for life. (Part of the payout of an annuity is a return of the principal investment, part of it is interest on the principal investment. Access to your money in an annuity can be limited.)
You create the payout plan by choosing an annuity with a lifetime payout option. Typically, the older you are when you purchase an annuity, the higher the payout rate. For a steady stream of monthly income, a fixed annuity is usually preferable.
Safely withdrawing from retirement accounts
Just under four in 10 participants in the survey knew the amount they could afford to “safely” withdraw per year from a retirement account. (It’s typically 4%.) Most people overestimated how much they could withdraw. Even though you might hope to earn 10% to 15% from your stock portfolio, you have to be fairly conservative in your withdrawals to make sure your money lasts for your entire retirement.
It’s difficult to put a good retirement plan into effect when you aren’t knowledgeable about the risks you may face. That’s why it’s critical to develop a plan that will ensure you’re on track for a secure future.