4 Misconceptions That Are Derailing Employee Retirement Readiness

Do you, like half the employers from a recent Principal Retirement Security Survey¹??, believe your employees are not ready to retire? Many recent studies^2,3 have shown that those at or nearing retirement age are not or do not plan to retire on time. In fact, twenty percent of those over 65 are still working with another 60% planning to work past 65. 

Unfortunately, this lack of planning and understanding has a great impact on you as the employer. Delayed retirement lowers productivity and increases costs.

One study found that a one-year delay in retirement can cost an employer $50,000 per year⁴, with that number increasing in subsequent years. 

The Principal data found that half of the employees surveyed were not participating in retirement income planning activities that would help them retire on time. They are not meeting with a professional, reviewing the estimated Social Security benefits, creating a formal plan, or even understanding how much money they will get from different fund sources. 

Because of these poor retirement planning skills, many employees have assumptions about retirement that are not true. Here are four that are most likely to derail retirement readiness.

#1: Unrealistic Medical Cost Assumptions

Seniors often do not understand the cost of medical care and assume that it will be similar to the costs when they were working. When asked, Americans stated that healthcare during retirement will cost⁵:

• Less than $50,000 (50%)
• Between $50,000 and $100,000 (37%)

However, this is not true.

The 2021 Retirement Healthcare Costs Data Report⁶ found the following about healthy individuals retiring at 65 in 2021:

• The life expectancy for men is 85 years old and for women is 87 years old
• Spend $662,156 on healthcare costs throughout retirement
• Spend 68% of their Social Security benefits on healthcare costs

The report also states that due to new regulations, those who are in the highest income-related monthly adjustment amount (IRMAA) bracket will be paying more for Parts B and D – a whopping $430 each month throughout the 2020s. 

A financial wellness program can help employees understand the need for healthcare planning in retirement. This can include using a Health Savings Account and increasing retirement savings to account for true healthcare costs.

#2: Underestimating Their Tax Burden 

Many people assume that their tax burden will be less upon retirement. However, this may not be true. Here are some of the reasons why:

• Fewer deductions: Many retirees no longer have the itemized deductions they had when they were working. For example, the loss of mortgage interest deductions and retirement contributions.
• Distributions from tax-deferred accounts are taxable.
• Government can raise tax rates.
• Social Security is subject to taxes for many seniors.

Providing a financial wellness program can help employees minimize their taxes in the future.

Working with a professional advisor will allow employees to move assets to tax-advantaged accounts and help with tax diversification strategies. 

#3: Not Planning the Need for Long-term Care

Few people want to focus on the end stages of retirement. However, the likelihood for many seniors is that they will end up in a long-term care facility.

One study suggests this is true for 70% of seniors. However, most do not realize that Medicare is unlikely to cover the fees.

According to a Genworth study⁷, monthly costs associated with long-term care are substantial. For example, here are the average monthly costs for the following services:

• Home health aide: $4,576
• Assisted living facility: $4,300
• Semi-private room in a nursing home: $7,756
• Private room in a nursing home: $8,821

Based on these numbers, annual costs for long-term care range from $51,600 to $105,852.

Employee financial wellness programs can help employees determine the best way to cover long-term care costs including increased retirement savings, purchasing long-term care insurance, and protecting assets to help you qualify for Medicaid services.

#4: Assuming Low Living Expenses

Most retirees have heard the 80% rule of thumb. This “rule” states that retirees will need approximately 80% of their pre-retirement income to live as they are currently living.

However, this rule of thumb doesn’t account for:

• Increased healthcare expenses
• Inflation
• Travel and new hobbies

The truth is that retirement planning isn’t as simple as following a rule of thumb.

Offering financial wellness can help employees look at their unique retirement needs based on when they want to retire, where they want to live after retirement, when they start taking social security, current longevity, and more. 

Keep Reading: 5 Steps to Get Your Employees Ready for Retirement

Enrich offers several resources to help your employees plan for retirement. These include the Planning for Retirement course, the Retirement Analyzer Tool, and hundreds of multimedia articles, videos, quizzes, and more.

To learn more about how the Enrich program can help employees toward retirement readiness, schedule a demo today. 

1 - https://secure02.principal.com/publicvsupply/GetFile?fm=PQ13007A&ty=VOP&EXT=.VOP   

2 - https://www.myirionline.org/docs/default-source/research/boomer-expectations-for-retirement-2016.pdf

3 - https://unitedincome.com/library/older-americans-in-the-workforce/

4 - https://www.prudential.com/corporate-insights/employers-should-care-cost-delayed-retirements

5 - https://www.plansponsor.com/health-care-costs-retirement-remain-top-stressor/

6 - https://hvsfinancial.com/wp-content/uploads/2020/12/2021-Retirement-HC-Costs-Report-op-final.pdf

7 - https://www.genworth.com/aging-and-you/finances/cost-of-care.html