The U.S. retirement system involves a number of key concerns that worry American workers who are preparing for their retirement years.
Suze Orman, the personal finance author and media personality, explains why the experience of transitioning to retirement can be difficult.
She also offers some coaching on compelling ways people can navigate the task and succeed in spite of the confusion many people feel.
Many workers worry that the savings they are trying to put away will not be sufficient to sustain their current lifestyles during retirement.
Social Security monthly paychecks are not enough on which to retire comfortably. The federal program is also facing a tough financial reality.
Americans are rightly concerned that Social Security benefits will be reduced sometime in the next decade as its trust funds look to run out of money. Without legislative action, paychecks could be reduced to 80% of their current projections.
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Health care coverage concerns are another factor. Medicare does not cover all expenses. Premiums, prescription drug costs and copays cost retirees money for which they must prepare.
And most long-term care costs are not covered by Medicare either. People need to buy insurance to take care of those potentially large expenses.
The complexity of these retirement planning costs are what Orman focuses on in her blunt assessment of the challenge.
A retired couple is seen walking along a beach. Personal finance personality Suze Orman explains a fundamental problem with retirement plans in the U.S.
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Suze Orman has a blunt take on pensions, Social Security and 401(k)s
Orman explains the reality that very few workers have pension plans for the future makes financial plans for retirement a tough task.
“The fact that so few workers are covered by traditional pensions that provide guaranteed income in retirement is one factor,” Orman wrote on LinkedIn.
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The personal finance author also starkly addresses problems with 401(k) plans and Social Security.
“Another issue is the poorly constructed 401(k)/403(b) system, which is full of so many potholes that are easy to trip up on,” she wrote. “And I would toss in the unintended consequence of our Social Security system, where it can be so difficult to understand and plan for the benefit of waiting to claim your retirement benefit if you are in good health in your early 60s.”
She recommends delaying Social Security retirement benefits for as long as possible, noting that a person can start receiving them at 62, but that every month they wait earns them a larger monthly paycheck.
Full retirement age for most people is 67, but waiting to claim Social Security until they are 70 years old gets people the highest payout.
Orman then explains a few steps people can take to address these challenges in their own financial lives.
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Suze Orman encourages people to start now and save more
Yesterday, Orman says, is the best time to begin saving.
But starting today, taking advantage of your employer’s matching 401(k) plan is a strategy not to miss.
Another important financial tool is a Roth 401(k) if it is available.
Orman believes both are great ways to save for retirement. She has a specific piece of advice regarding Roth 401(k)s.
“The big difference is when you are taxed,” Orman explains. “With a Roth 401(k) you contribute money that has already been taxed. Then it can grow for decades tax-exempt, and when you make withdrawals in retirement you get the big win: no tax is due on your withdrawal.”
Orman also encourages people to simply save more. She targets saving 15% of a person’s income as the place to start.
But she recognizes that not everyone is in a financial position to begin there. If a worker can save 5% or 10% and increase that amount by 1% per year, that can amount to significant retirement savings for the future.
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