Four Ways Retirees Can Protect Their Savings

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Even though the United States has a retirement system, it is not perfect. Compared with the retirement systems in other developed nations, it has become apparent that there are flaws in America’s system—chiefly because not everyone has access to a secure financial future.

1) Have a Retirement Plan

The biggest retirement system flaw, says Yahoo.News, is that most workplaces do not have a retirement system available for their employees. There are no 401(k)s, IRAs, or other plans available for them to save for retirement.

The result is that about 57 million people in the private sector are without a retirement plan in 2020, says a report by the Center for Retirement Initiatives, which is out of Georgetown University. According to that report, about 67.3 million have access to workplace-sponsored retirement plans, leaving 46 percent without one.

Another big problem with the retirement system is that too many retirees run out of money. They do not save enough to cover their expenses for the long haul. Many people are looking for early retirement—not realizing whether or not they have enough.

A report from Yale helps put this in perspective. In 2010, Yale said that most Americans (75 percent) getting close to retirement age had $30,000 saved in retirement accounts. While that may sound like a decent sum at first, when broken down over a 20-year retirement, it means only $4 per day (or, $120 per month). It is even less if people live another 25 or more years after retiring.

2) Start Saving Now

In order to ensure that you have enough money to retire comfortably, you need to start saving money as soon as possible. The power of compounding interest enables your money to multiply considerably more when you give it more years. It is just as important to put your money in the right places to protect it.

If your employer offers matching contributions in a retirement account, take advantage of them and contribute at least as much each year. Add more if possible. It is not too late to start if you have not made contributions yet.

3) Wait Longer for Social Security Benefits

One solution to not having enough is to wait longer before you retire. You get the maximum Social Security benefit if you wait until 70 to start getting payments. Payments increase by 8 percent each year after 62 if you wait; they stop growing at 70. Remember that the more you get from Social Security, the less you need from other sources. In your planning, keep in mind that payments from Social Security could be reduced to 80 percent in 2035.

Another solution to help ensure you do not run out of money too soon is to keep working past 70, or as long as possible. Consider the time waiting until you can get full benefits as an investment in your future and a way to ensure enough money will be available.

4) Open a Health Savings Account

The average 65-year-old couple will pay $315,000 during retirement for medical expenses. It is apt to be your biggest expense during your retirement years. Unfortunately, medical costs continue to rise.

One solution, for some people, is to open a health savings account (HSA). These are not for everyone because they require a high-deductible health insurance policy to go with it. The premiums are lower than standard health plans because of the high deductible.

Your contributions to an HSA are pretax, which will lower your taxes. You can contribute $3,650 as an individual and $7,300 for a family. The money earns interest tax-free. Money used for medical purposes is tax-free and can be used any time. At 65, you can withdraw money for any purpose, and it will still be tax-free. There is a penalty for money used for nonmedical purposes before 65.

An HSA works best if you can pay for your health costs out-of-pocket. When used this way, it enables you to build a bigger nest egg that is tax-free. BlueCrossMN says that if you maintain a balance of $1,000, you can invest it and earn money faster.

Some Further Thoughts

Taxes on Retirement Money

Some retirement accounts are subject to taxes when withdrawing the money. It happens because the money is put into those accounts pretax, before paying any taxes. You will pay taxes when withdrawing money from a traditional individual retirement account (IRA), a simplified employee pension (SEP) IRA, and a traditional 401(k). Taxes are often less for most people during their retirement years because they have a lower tax bracket.

If you want to eliminate taxes on your retirement income to ensure you have more money, you may be able to contribute to a Roth IRA or a Roth 401(k). Contributions to these accounts are aftertax, which enables you to make tax-free withdrawals during retirement. A Roth IRA has the advantage of not having any required minimum distributions (RMDs).

If you are self-employed and do not have access to a retirement plan through an employer, you can open a SEP IRA account. Investopedia says that these accounts can be opened by an employer or by someone that is self-employed. The contribution limits are much higher for a SEP IRA than for a traditional IRA. You can contribute the smaller amount of either $61,000 (for 2022) or 25 percent of your compensation.

Protecting Your Retirement Accounts

IRAs and 401(k)s are subject to stock market fluctuations because they invest heavily in it. As a result, you can lose some or possibly all of your investment money in these accounts.

You can help protect your retirement money, says AnnuityExpertAdvice, by diversifying. While not new advice, understand that it means you should not put all your retirement money in one place. Annuities typically do not lose any money in a stock market crash—but they may not gain either. The exceptions for loss are a variable annuity or a registered index-linked annuity.

Fool.com mentions that you can prevent loss to your retirement funds by reducing your investment in the stock market. They recommend following the advice of subtracting your age from 110. The result gives you the percentage of investment you should have in stocks—and put the rest in more stable products such as bonds.

Talk to a financial advisor to learn the best ways to save money for retirement and find out if you have enough. They can help you determine the best places to put your money and help you diversify them for the most protection. Check around for the best prices for services before you do—or you may lose more money than necessary.

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