Americans' Retirement Readiness Gets a Bad Grade in One Area

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Millions of Americans risk not being ready for retirement. Like kryptonite to Superman or Achilles' vulnerable heel, one issue is weakening retirees' retirement preparations.

That troubling news comes from a retirement readiness study conducted by IRALOGIX, a technology company specializing in IRAs.

The IRALOGIX Retirement Readiness Index (IRRI) surveyed pre-retirees and asked them 20 questions to assess their readiness for retirement. The questions spanned five key areas: health care; savings and investments; lifestyle and spending; economic and policy confidence; and emotional well-being.

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The index revealed a national retirement readiness score of only 45.8 out of 100; scores below 50 are in the "Moderate Risk" zone.

In a press release regarding the data, IRALOGIX explained the average score indicates that "many pre-retirees may face uncertain futures without adequate savings, health care coverage, or financial confidence to sustain themselves through retirement."

Why are Americans falling so short in retirement readiness, and what can be done about it?

Why most Americans have low retirement readiness

Americans are falling short of the ideal scores in three key areas:

Health care readiness
Savings and investments
Lifestyle and spending

However, health care readiness was the worst category, with Americans earning just 6.3 out of a possible 15 points. Key gaps included a lack of understanding of how Medicare works, the absence of a plan for covering health care emergencies and a lack of preparedness for chronic illness.

"Americans are unprepared for the costs of health care in retirement because people are living much longer lives," warned Steve Azoury, ChFC® and owner of Azoury Financial. "The longer you live, the more care you’ll likely need. Health care in retirement has become extremely costly, and many Americans don’t think about it when they’re younger."

Long-term care (LTC): The retirement Achilles' heel

19th century sculpture of Achilles dying after being shot through the ankle with an arrow. Achilles is in Greek mythology an almost invulnerable hero of the Greeks before Troy and the main hero of Homer's Iliad.

John Gillet, CEO and founder of Gillet Agency in Hollywood, Florida, says many pre-retirees are understandably caught off guard by health care expenses.

It's challenging enough to plan for routine spending, he explains, much less for one of the highest costs of all: The potential need for nursing home or home care, the proverbial Achilles' heel of retirement.

"Many Americans are just unprepared for normal living expenses in retirement," he said. "Therefore, it's no surprise they haven't given serious consideration to the potentially growing health care expenses they may encounter. The most significant health care expense bomb that's itching to detonate and blow away many retirement dreams is long-term health care."

As many as seven in 10 Americans are likely to require long-term care. A 2024 Cost of Care Survey by the insurance company Genworth reveals average costs at $6,483 per month for home health aides and $10,646 for a private nursing home room. Without long-term care insurance or a substantial nest egg, these costs can be ruinous for retirees.

Poor retirement readiness raises LTC risk

IRALOGIX also acknowledged that many Americans have saved too little in general, with survey respondents earning just 15.1 of a possible 35 points in the savings and investment category. Many don't understand how to create a sustainable retirement budget or withdrawal strategy, either.

These issues only exacerbate the crisis that being unprepared for health care spending could cause, as those with too little savings and no clear budget will have an even harder time covering their medical needs.

Retirees can, if necessary, cut many expenses in retirement, from downsizing to a less expensive house to moving to a lower cost-of-living area. But there's no escaping the fact that estimates suggest the typical 65-year-old retiree in 2024 would need $165,000 to cover out-of-pocket expenses not paid for by Medicare during retirement.

With health care costs rising faster than inflation, future retirees will need an even larger sum. As the IRALOGIX report shows, not having a plan for this is one of the key factors undermining retirement readiness.

How you can be more prepared for the future

Planning for health care simply isn't optional for future retirees. As you think ahead to retirement expenses, and especially before deciding it's time to retire, it's critical you make sure you can cover these costs.

"In planning for retirement, build a budget that covers what you believe to be all your fixed monthly expenses, including health care expenses," advised Domenick D'Andrea, an AIF®, CRC®, CPFA® and co-founder of DanDarah Wealth Management.

Azoury agreed, stating, "Just like living expenses will need to be calculated, so do health care costs. As you age, costs will rise, so it’s important you factor that in, as well."

To estimate your budget, be sure you understand what Medicare covers and excludes, as common care needs such as dental costs, hearing aids, and long-term care aren't covered.

You should also understand that traditional Medicare comes with 20% co-insurance costs for most outpatient care, so you'll need to look into the cost of Medigap plans that supplement traditional Medicare or Medicare Advantage Plans that replace it.

Consider your family's health history and your current health status when estimating what you'll likely need to spend. Don't forget about preparing for nursing home or home care.

"A properly structured long-term care plan can help Americans pay for these unexpected care costs," Gillet says. This could include buying long-term care insurance or making a Medicaid plan with an estate planning attorney.

Improving your overall retirement readiness can also be helpful. You can do this by identifying a safe withdrawal rate, creating a spending plan and increasing the amount you save and invest.

"Americans who are over the age of 50 can use the catch-up provision and contribute an additional $7,500 into their 401(k)," D'Andrea said. "Secure 2.0 also allows a super catch-up contribution for people from age 60 to 63 to increase their contribution by $11,250 instead of $7,250."

D'Andrea also said if you can't save more, working longer might be your only option if you aren't fully prepared for health care and other expenses.

Ultimately, the more you can invest for retirement, and the clearer you are on your budget, the better your chances of covering health care costs. If you aren't sure your money will stretch far enough, it simply might not be your time to retire.

Christy Bieber is an experienced personal finance and legal writer who has been writing since 2008. She has been published by Forbes, CNN, WSJ Buyside, Motley Fool, and many other online sites. She has a JD from UCLA and a degree in English, Media, and Communications from the University of Rochester.