Why Relying Completely on Government Benefits Could Lead to a Delayed and Worrisome Retirement

Many aspire to retire by 55, but why is the average retirement age well above 60? This may be because of the financial decisions that some people make during their working years. Some people apply for credit cards even before they get a job, while others mistakenly believe that Social Security benefits and Medicare will take care of them in retirement. Furthermore, rapidly-changing consumer behavior and easy access to borrowed credit is making many people live in the present at the cost of their financial future.

Retirement often feels like a distant goal that gives us the impression that we can always plan for it tomorrow. What we fail to realize is that we could choose our retirement age if we look beyond government benefits that are designed to pay you well above the age of 60 years. While 401(k)s allow you to withdraw at the age of 591/2, you might accrue over a million dollars way before the age of 60 if you start making significant 401(k) contributions at an early age.

Here's an estimate of 401(k) savings you would accumulate when you contribute $12,000 annually or $1,000 a month for 30 years starting at the age of 25 with seven percent returns on investments, compounded annually.

The snapshot estimates that you would have accumulated nearly $1.1 million in your 401(k) by the age of 55, whereas your contributions would only be $360,000 in those 30 years. What you must understand here is that the power of compounding only works when you make consistent contributions without breaking your egg nest during financially trying times.

What is the Average Monthly Social Security Benefit?

In 2021, over 65 millions Americans will receive Social Security benefits every month, totaling $1 trillion paid during the year.

Millions of Americans depend on their Social Security benefits every month for basic expenses. The optimum age for claiming Social Security benefits is 67, which would fetch more than someone claiming at 62. Bear in mind that once you start claiming, you will be locked into the amount for life.

Forbes stated that the maximum Social Security benefit for someone claiming at full retirement in 2021 is $3,011. However, the reality is very different. A 2021 Social Security Administration fact sheet stated that the average monthly benefit stood at only $1,555, which could be due to claiming early due to financial hardships, pandemic-induced early retirement, health reasons, or simply not having enough savings in other investment vehicles.

Furthermore, a Congressional Budget Office 2020 report estimated that the Social Security trust fund balance could dramatically reduce from $2.7 trillion in 2021 to $533 billion in 2030. This might be because people aged 65 and above are expected to increase from 57 million in 2021 to 76 million by 2035. In case Social Security funds continue to decline as projected, the US government will have no option but to hike up taxes or significantly reduce monthly benefits.

The takeaway here is that you should treat Social Security as a supplemental income rather than a primary source of income while focusing on guided investment solutions to turn your existing wealth into a fortune.

What Does Medicare Cover and When?

Medicare is a health insurance program offered by the U.S. government that covers a range of medical services for people aged 65 years old and above. Some younger individuals with certain diseases or those who fulfill a special eligibility criteria may benefit from it, as well.

The Medicare plan covers hospital bills, doctor visits, medical tests and supplies, medical equipment, prescription drugs, and several other health-based services. Medicare might also cover a portion of your stay in nursing facilities for up to 100 days. However, it won't cover long-term custodial care that requires daily assistance. Why is this important?

An MIT Agelab study estimated that someone retiring in 2021 could live up to 22 years in retirement. Moreover, the Administration for Community Living mentioned in a 2020 report that 20 percent of those retiring at 65 years of age in 2020 might require long-term care at home or in facilities for more than five years. Almost 70 percent have a chance of requiring some form of long-term care or support for three years on average, spread across their retirement life.

Now, according to a Genworth Cost of Care Survey, the annual cost of a private room in a nursing home facility in 2021 is estimated to be a whopping $109,026. If Medicare doesn't cover your long-term care needs, your lifetime savings could deplete at a very fast rate.

Overall, Fidelity Investments estimated that an average couple retiring at the age of 65 in 2021 might need $300,000 in savings for healthcare in their remaining years. The average 401(k) balance fell to $91,000 during the pandemic and climbed up steadily to $129,300 in 2021, which is still lower than what you might need in later years.

Knowing Where to Invest is as Important as Choosing to Invest

Managing personal finances without adequate knowledge, guidance, or tools could wreak havoc on your present financial stature and long-term retirement goals. Financial illiteracy has always been the primary reason for the downfall of investors with a DIY approach to selecting stocks or timing the market. Moreover, failing to understand that the economy follows a sine curve of market booms and recessions over time leads many to make impulsive money moves that seldom work.

The cost of financial illiteracy might have been higher than usual in the pandemic. A National Financial Educators Council 2020 survey of 1,548 people revealed that 12.7 percent of them lost over $10,000 because they didn't know how to manage their personal finances. The average person lost $1,634, and 21.6 percent lost over $2,500. When this result is extrapolated to consider 254 million U.S. adults, the cumulative loss due to financial unawareness stood at an estimated $415 billion in 2020!

If you are thinking about creating a robust portfolio of stocks and bonds, real estate, and other asset classes, a financial advisor might be able to help to a great extent. Generally, client-advisor relationships that work well could last for decades. Financial advisors are trained to understand your current financial situation, taxes, risk appetite, and retirement timeline to help you avoid pitfalls and possibly profit when the market is on a bullish trend.

A market crash could adversely affect a 401(k) due to sub-standard investments compared to a 401(k) that was carefully chalked out by an experienced financial advisor. Moreover, in-house advisors could also help you refrain from making impulsive investments when the market appears to be out of control.

What to Look For in a Financial Advisor

Financial advisors either follow fiduciary standards or suitability standards. The former requires advisors to ethically and legally find the best possible investments for you, whereas the latter requires them to find investments that suit your profile (not necessarily the best one). One way to narrow down your search for fiduciary advisors is to find out if they have the Certified Financial Fiduciary (CFF) certification.

Typically, financial advisors charge between one to two percent of the assets under management. So, if you delegate assets worth $500,000 to your financial advisor, the annual fees for managing those assets could range from $5,000 to $10,000.

When looking for a financial advisor, people typically ask their trusted friends and family about their experiences with advisor reputation, fees, and certifications. When searching online, you may visit the U.S. Securities and Exchange Commission's Investment Adviser Public Disclosure website and filter advisor information using individual advisor name, name of advisory firms, or the city/state you live in.

If you are taking the online route, there's a billion-dollar fintech company called SmartAsset that you might want to check out. Their cutting-edge platform connects vetted fiduciary advisors with potential investors within minutes. When you fill in a brief online form about when you want to retire, how you would like to spend your retirement funds, how confident you are about your long-term plan, and other similar questions, their proprietary tech will connect you to up to three vetted fiduciary advisors near you within minutes. SmartAsset ensures that they will match you to advisors who might actually align with your retirement goals. Once matched, you may then interview them to see if they are a good fit.

This New York-based fintech company helps over 65 million people every month with award-winning financial tools that cover the entire spectrum of personal finance. Their proprietary financial modeling tool simulates how financial decisions made today could impact your future goals, as well.

Match with a fiduciary financial advisor today.