The New Realities of Retirement: Safeguarding Your Future

Retirement is a much different reality today than it was even a generation ago.

First of all, the age when people retire is shifting upward: According to the U.S. Census Bureau, the proportion of people age 65 and older in the workforce grew to 16.1 percent in 2010, up from 12.1 percent in 1990.

Another thing that’s different? The ways people are building their retirement funds. For most, a company pension plan isn’t even on the table any more. That leaves future retirees navigating their way though do-it-yourself investments and retirement accounts as they try to find the best fit for their circumstances. People are looking to different vehicles to build the funds they’ll need to live on after retirement.

Preparing for life after work still is very doable, but you’re more likely to be successful if you understand the new rules of retirement we have today. Here are a few thoughts to consider.

You must start saving. Okay, the importance of saving for retirement is hardly a new concept. But the message does not seem to be hitting home: Today’s workforce has more debt and less savings that the generations before them. The PwC 2012 Financial Wellness Survey showed 33 percent responding workers were not saving any money for retirement, and of them, 48 percent were more focused on paying off debt than saving for retirement.

Obviously, it’s very important to pay off debt, but saving for retirement is one area you can’t afford to neglect. Making monthly contributions should be just as important as paying your bills, or there will be a time when there’s nothing in your retirement account to cover the electricity, water and groceries.

Most financial advisors recommend devoting at least 10 to 20 percent of your income toward retirement. If that sounds impossible to you, start with a smaller percentage for now.

Use those savings tools. If your employer offers matching funds toward retirement, make full use of that benefit. If you’re not, you’re turning down free money.

If you don’t have access to employment benefits through a job, there are savings programs available to you, each with their own pros and cons.

An upcoming program, “myRA,” will be geared toward new savers, low- and middle-class earners and people who don’t have retirement savings programs through their employers. When the program launches, possibly by the end of this year, employees will be able to open a fund with $25 and contribute as little as $5 per payday.

This plan might be a helpful way to get into the habit of saving, but the funds will be invested into the Government Securities Investment Fund, which has had an average annual return of 2.24 percent during the past three years. This plan will not get you where you need to be without help.

Individual Retirement Accounts, on the other hand, are an extremely valuable tool for preparing for retirement. Traditional IRAs let you deduct the amount you contribute in a given tax year from your income, saving you taxes. Distributions are taxed when withdrawn, when you might be in a lower tax bracket.

Roth IRAs are not tax-deductible, but you can withdraw any contribution –not earnings — at any time without taxes or penalties.

Plan for medical bills. Don’t assume Medicare will cover everything you need after retirement. A 2010 study by the Center for Retirement Research at Boston College estimated that by age 65, the average US couple could expect to pay about $260,000 out of pocket on health care. Because few people have access to that kind of money, they face the risk of being forced to rely on Medicaid or impoverishment.

One thing you can do to prepare for the likelihood of steep medical bills is to open a health savings account (HSA). These accounts are available to individuals with health insurance deductibles more than $1,250 and to families with deductibles more than $2,500. Individuals can make as much as $3,300 in tax-deductible contributions to an HSA in 2014, and families can contribute $6,550. The money can be used for qualified medical expenses, and it can be contributed, grown, and withdrawn with no tax penalty.

Here’s a retirement-related plus: if you’re lucky enough to be healthy later in life and you don’t anticipate a lot of medical bills, you can withdraw from your HSA after age 65 and pay only ordinary income tax. Then you have the benefit of a larger than normal IRA contribution limit.

Working until age 70 is not necessarily a bad thing. As of 2012, only about half of U.S. households could expect to maintain their current standard of living upon retirement at age 66, the Center for Retirement Research estimated. But if the families’ workers were to retire at age 70, the center said, about 86 percent could expect a comfortable retirement. The delay would mean larger Social Security checks, more time for saving compounding interest, and less years of retirement to finance.

Working more years won’t be an option for everybody, but it is worth considering.

A final thought: when it comes to preparing for retirement, you really have to depend on yourself to get the job done. To be effective, you’ll need to learn as much as you can about personal finances and stay on top of this topic.

It’s likely that the dynamics of saving for retirement will continue to change in coming years, but there’s no reason to look to the future with apprehension. Stay informed, and diligent about saving, and you’ll be protected when it’s time to retire.