Is there such a thing as a foolproof plan? Not likely! Often—when you feel like you have planned for everything—something is still forgotten. Maybe you forgot to invite Grandma's best friend to the birthday party you gave her. Or maybe you didn't have enough food. Even when you think you have everything planned out, something can still go wrong. The same can happen with your retirement plan.
Some people think they have a foolproof retirement plan. Then something goes wrong. Click the tabs below to learn about potential challenges with retirement plans and what you can do to overcome them; then use this information to answer the questions.
How long do you expect to live after retirement? No one knows how long they will live, which makes planning for retirement difficult. You may live into your 80s and beyond. If you retire at age 65, that means you have to plan for 20 years or more of income. How can you plan an income for that long?
You learned the importance of saving early for retirement to grow your money. Once you retire, one strategy is to withdraw 4% of your retirement savings each year to use for your living expenses. This strategy would give you an income for approximately 25 years. Look at the example below to see how this strategy works.
If you have managed to save $300,000 in a retirement fund and you withdraw 4% yearly, how much will you have each year for your living expenses?
\( \$300,000 \times .04 = \$12,000 \) a year
How many years can you withdraw this amount?
\( \frac{300,000}{12,000} = 25 \) years
Now try to figure out this scenario yourself: If you have managed to save $1,000,000 in a retirement fund and you withdraw 4% yearly, how much will you have each year for your living expenses? Will your money last 25 years?
\( 1,000,000 \times .04 = \$40,000 \) a year
\( \frac{1,000,000}{40,000} = 25 \) years
How will your health be when you retire? As you get older, you could have more health issues and you may not be able to take care of yourself. Some elderly people are required to go into a nursing home. You learned that Medicare covers some medical care but that doesn't include nursing homes. Medicaid covers nursing home care, but it requires you to have limited income and assets.
Buying long-term care insurance is one way to prepare for possible medical issues. Long-term care insurance pays for daily assistance and nursing home care if you can't take care of yourself, and it is offered by most insurance companies. Waiting to purchase long-term care insurance until you need it isn't an option, as then you may not qualify. The amount you pay for this extra insurance will depend on your age, health, and type of coverage. Most people purchase this insurance in their 50s.
What do you plan to do in your free time when you retire? You were busy eight hours a day or more during your career. Now what are you going to do? Many forget to plan for what they are going to do with their time. Not only should you plan for your financial future but also your free time.
Most people plan to do all those things they couldn't do during their working career, such as travel or take up a new hobby. New activities can require money. Will you have enough to cover these activities? Make a plan to stay engaged and productive while having enough money to fund those activities.
Use your knowledge of retirement plans to answer the question below.
Question
Why is it important to plan for health insurance after retirement?
When you are older, you may have more health issues. Medicare will cover some of your health expenses but not all of them. It is important to consider extra coverage beyond Medicare to pay for extra expenses such as nursing home care.
