How to Overcome Your Fear and Enjoy Retirement

Sandra Block September 6, 2023

This article appears at the following website: kiplinger.com

Even if you have a well-funded nest egg, giving up a paycheck is hard. Here's how to start the journey.

While not as terrifying as aerophobia (fear of flying), as common as nomophobia (fear of being without your phone) or as unnerving as coulrophobia (fear of clowns), fear of retirement is a real phenomenon for millions of older Americans.

If you’re behind on saving, the fear is probably warranted. But even if you’ve accumulated a substantial nest egg, the thought of going without a regular paycheck may be scarier than a roomful of circus clowns.

“Although someone may be financially well prepared to retire, emotionally it can be very difficult,” says Edward Snyder, a certified financial planner in Carmel, Ind.

A recent report from Northwestern Mutual found that Americans, on average, expect to work until age 65, up from 62.6 in 2021. Many are working much longer than that, even if they can afford to retire. About 650,000 Americans in their eighties were working last year, according to an analysis of census data by the Wall Street Journal, up about 18% from a decade ago.

Given the increase in longevity, it’s not surprising that Americans are working longer, but the motivation to stay on the job isn’t necessarily financial. A survey by Hearts & Wallets, a research firm, found that nearly 20% of respondents between 65 and 74 with investment assets of between $2 million and $5 million were still working. “Whether households are retired or not has very little to do with investable assets,” the report said.

The downside to delaying retirement is that you may miss out on some of the best years of this stage of life. “We emphasize that retirement has the Go-Go, Slow-Go and No-Go years, and we don’t want to see clients sacrifice their Go-Go years because they are afraid of uncertainty,” says Nicholas Gertsema, a certified financial planner in Saint Joseph, Mo.

Delaying retirement can also create stress in your marriage if your spouse has stopped working and doesn’t want to hike the Camino de Santiago trail alone.

Baby steps

One of the most effective ways to make the transition to retirement is to do it gradually. Thanks to a tight labor market, along with the need to retain experienced workers, it’s easier than ever to shift to phased retirement, which typically involves working fewer hours, sometimes in a mentorship role.

Elizabeth Emshwiller, 69, retired in 2021 after 37 years as a registered nurse but found that she missed her patients and the camaraderie she experienced while working in a hospital. At the same time, she didn’t want to work the long hours typically required of hospital staff nurses. She also wanted flexibility to work on her own terms.

While looking at jobs on Indeed.com in January 2022, Emshwiller learned about the Emeritus Nurse Program at the Novant Health New Hanover Regional Medical Center, in Wilmington, N.C., which employs retired nurses to coach and mentor new nurses. She applied for the program and is now one of 12 emeritus nurses at the center.

Emshwiller works four to five hours a day in the neurosurgery unit, which she requested because she had experience working there. On a typical day, she’ll meet with new nurses to discuss physical therapy, diet and other recommendations for patients in their care. She chooses which days she wants to work. As for retiring a second time, “I haven’t even thought about it,” she says. “I love what I’m doing so much.”

Nearly one-fourth of employers offered phased retirement in 2021, up from 16% in 2016, according to a survey by the Society for Human Resource Management. It can be a win-win for employers and employees. Companies continue to benefit from older workers’ experience, and workers continue to earn some income while testing the retirement waters.

Only a handful of companies have implemented formal phased-retirement programs. Instead, the arrangement is usually done on an ad hoc basis, with employers more inclined to offer it to workers who have specific skills or experience they value. Snyder says many of his clients who worked for Indianapolis-based Eli Lilly continue to consult for the pharmaceutical company after they leave their jobs.

If you’re interested in phased retirement, start the conversation with your employer well before you plan to make the shift. Point out how the arrangement will benefit the company. Make sure you and your employer have a clear understanding of how many hours you’ll work, says Chris Pollard, a CFP in Goshen, N.Y. That’s particularly important if you’re the type of worker who arrives early and stays late. “You don’t want to become a full-time employee at half the pay,” he says.

In addition to agreeing on hours and pay, talk to your employer about whether you’ll still be eligible for benefits, such as company-provided health insurance and participation in your retirement savings plan.

Currently, employers are required to allow part-time employees to contribute to their retirement plan after they’ve worked at the company for at least 500 hours a year for three years, or more than 1,000 hours for one year. Starting in 2025, the eligibility threshold will decline to 500 hours a year for two years. But there’s nothing to prevent your employer from allowing you to contribute to your retirement plan, even if you work fewer hours than that.

Replacing your paycheck

For many workers, one of the most unsettling aspects of retirement is giving up the security of a paycheck. A regular paycheck allows you to put your finances on auto-pilot, with funds deposited directly into checking, retirement savings and other designated accounts. Many workers also set up automatic bill payments, which can help you determine how much you’ll have left over each month and whether you’ll need to cut spending.

Financial planners say one of the most effective strategies to get over the fear of losing your paycheck is to replicate that system: Estimate the monthly amount you’ll need for discretionary and nondiscretionary expenses, then arrange to have that amount automatically transferred each month (or more frequently if you’d prefer) from your savings to your checking account.

For this strategy to work, you need to figure out how much money is required to cover the basics, such as utilities and food, and extras, such as travel and extracurricular activities. To help his clients make an accurate estimate, Snyder has them fill out a worksheet that lists everything from mortgage payments to haircuts. After you have a handle on what you usually spend, you can decide how much to withdraw from your savings, with the understanding that you can adjust that amount as your lifestyle changes.

You’ll need to rebalance your portfolio periodically to make sure you have enough in your cash “bucket” to cover your expenses. Ideally, you want to have two years’ worth of expenses in a low-risk account, such as a bank savings or money market account — which is another reason to come up with a good estimate of how much money you need to live on (see below for more on how to use the bucket system to invest funds in your retirement portfolio).

If this exercise seems daunting and you’re still a year or two from leaving your job, try living for a few months on the amount you think you’ll need after you retire. Snyder says this exercise often eases the transition to retirement. If one spouse has retired and the other is still working, you can also try what Snyder calls “staggered retirement” — living on one income to see how much of your expenses that will cover.

Laura Jansen, a CFP in Scottsdale, Ariz., uses a similar strategy for clients who are reluctant to take the leap. In the months before their planned retirement date, she transfers an amount equivalent to their paycheck from their investment account to their checking account. “Seeing the money physically appear in their checking account gives them the confidence that they can continue to pay their bills without their day job,” she says.

Keep your day planner

Retirement will seem less daunting if you make a plan for how you’ll spend your time. Pollard asks his clients to describe what their ideal week in retirement would look like and then to come up with a plan to make it work. For people who have worked for most of their lives, he adds, “going from high structure to no structure can be very disorienting.” And from a financial perspective, developing a plan for retirement will help you get a better estimate of how much you’ll need to withdraw from savings to pay your expenses.

Guaranteed Income

If the fear of outliving your money is preventing you from retiring, you may want to consider annuitizing part of your retirement savings.

Annuities come in many flavors, with varying degrees of complexity. This has given rise to abuses and chicanery, with some sales agents persuading senior citizens to buy products with high commissions and hefty surrender penalties. But in recent years, a growing number of companies have developed commission-free annuities. Because the annuities have no commission, certified financial planners can offer them to clients without violating the fiduciary rule, which requires them to put clients’ interests above their own.

Single premium immediate annuity (SPIA)

The most straightforward annuity is a single premium immediate annuity, or SPIA. With this annuity, you give an insurance company a lump sum in exchange for a regular payment (usually monthly) for the rest of your life (or, in the case of a joint-and-survivor annuity, as long as the surviving spouse lives) or for a specific period.

The advantage of these products is that it’s easy to comparison shop. At www.immediateannuities.com, for example, you can provide the amount you’d like to invest, input your age and get an idea of how much income your money will buy.

The downside is that you usually give up the ability to take additional withdrawals from the account. You may be unwilling to give up that kind of flexibility, especially early in your retirement years.

Fixed-index annuities

Other types of annuities allow you to invest a portion of your savings in an account that will grow until you’re ready to start receiving guaranteed income, says David Lau, founder and CEO of DPL Financial Partners, which distributes annuities and life insurance to financial planners.

For example, a fixed-index annuity provides returns linked to a specific index, such as the S&P 500. Instead of investing your money directly in stocks, though, insurance companies invest most of it in fixed-income investments and use options to provide the potential for higher returns. In exchange for protection against losses, fixed-index annuities limit how much you earn. If your contract has a cap of 6% over a specific period, for instance, you’ll earn a maximum 6% rate of return, even if the S&P 500 index rises 20% during that same period.

Fixed-index annuities (along with other types of annuities) typically come with a rider that allows you to convert your account to a pension-like stream of income. This feature, known as a guaranteed lifetime withdrawal benefit (GLWB), provides a guaranteed payout from your annuity each year for the rest of your life — or, depending on the rider, for the rest of your life and your spouse’s life — even if the account balance falls to zero. The rider usually costs between 1% and 1.5% of assets.

Lau says his firm often recommends that clients invest in a fixed-index annuity with deferral credits. As with Social Security benefits, the longer you delay turning on the income stream, the larger the payout, he says. Some products add 0.25% or 0.35% to your payout rate for every year you wait to take income.

Fixed annuities

An option with fewer bells and whistles than a fixed-index annuity is a fixed annuity. In this case, you give an insurance company a lump sum in exchange for a guaranteed interest rate for a set period. A multiyear guaranteed annuity is a type of fixed annuity that pays a guaranteed rate for three to 10 years. Some three-year versions of these annuities are paying a 6% rate, compared with a rate of 4.5% to 5% for the top-performing 3-year certificates of deposit (CD). Interest is tax-deferred until it is withdrawn.

Don’t invest money that you think you’ll need soon in fixed-rate annuities — they typically come with surrender charges of up to 7% if you withdraw more than a specified amount before the end of the contract term.

Benefits of annuities

For some time now, financial planning experts have recommended annuities to retirees who are legitimately concerned that they’ll run out of money. But the products could also appeal to retirees with well-funded nest eggs, Lau says, because it allows them to invest their savings more aggressively than they otherwise would. If your annuity covers basic expenses, he says, you don’t have to worry about selling your stocks or stock funds in a down market to pay the bills.

Filling your buckets

If your account balance shrinks significantly during the early years of retirement, you’ll have fewer assets to create returns during market recoveries, increasing the risk that you’ll run out of money in your later years.

One of the most effective ways to avoid this scary scenario, known as sequence-of-returns risk, is to employ the bucket system, which involves dividing your savings among three accounts, or “buckets.”

The first is a liquid account designed to cover living expenses for the next year or two, after accounting for a pension and Social Security. The second bucket holds money you’ll need over the next 10 years; it can be invested in short- and intermediate-term bond funds. The third bucket holds money you won’t need until much later, so it can be invested in stocks, stock mutual funds or exchange-traded funds, or even alternative investments, such as real estate or commodities.

Retirees typically invest funds in the first bucket in ultra-safe investments, such as bank savings accounts and money market mutual funds. Rising interest rates have made those accounts more palatable than they were a couple of years ago, with some online savings accounts and money market funds paying rates of more than 5%.

Still, although investing in these types of low-risk accounts may help you sleep at night, your returns will lag inflation, and that will reduce your purchasing power over time. Filling your first bucket with an annuity that provides guaranteed income will offer the same protection while providing a higher rate of return, Lau says. When you buy an annuity, the insurance company pools your money with that of other investors, and funds from investors who die earlier than expected are paid out to those who live longer. These “mortality credits” allow insurance companies to provide a higher yield than you’d get from similar fixed-income investments.

A health scare

Although you can come up with a reasonable estimate of your living expenses in retirement, it’s difficult to predict how much you’ll spend on health care, especially in your later years. Once you turn 65, you’ll be eligible for Medicare, but you’ll still be on the hook for a variety of costs, including Medicare premiums, co-payments and deductibles. And, significantly, Medicare doesn’t cover long-term care, whether it’s in your home or at a nursing home or assisted-living facility.

A 65-year-old couple will spend $315,000 on health care in retirement, excluding long-term care, Fidelity Investments estimates. What you end up spending will depend on a variety of factors that are hard to predict when you’re in your sixties or even seventies. Though it’s not difficult to envision a worst-case scenario in which years in a nursing home deplete your savings, “it’s not very likely,” says Carolyn McClanahan, a physician and CFP based in Jacksonville, Fla. She recommends planning for five years of long-term care — which includes home care, assisted living and skilled nursing care — but notes the average individual needs long-term care for two to three years. According to the Administration for Community Living, most people who go into a nursing home stay for less than 12 months.

Nonetheless, long-term care — whether it’s in your home or an institutional setting — can be prohibitively expensive. The median cost of a semiprivate room in a nursing home is more than $94,000 a year, according to Genworth’s annual Cost of Care survey. The median cost of an in-home health care aide is more than $61,700 a year, according to Genworth.

Long-term-care insurance is one way to cover these expenses, but premiums are pricey — especially if you’re in your sixties, because premiums rise as you age. The average annual premium for a 65-year-old couple is $3,750 for $165,000 of coverage for each spouse, according to the American Association for Long-Term Care Insurance. If the policy includes an annual inflation adjustment of 3% — which seems prudent, given the rise in health care costs — the premiums average $7,150 a year; with a 5% annual adjustment, the average annual premium jumps to $9,675. And there’s no guarantee those premiums won’t rise in the future as health care costs continue to increase.

Here are some other strategies to build health care costs into your retirement plan:

Use your home equity

Tour any retirement facility and you’re likely to talk to many residents who are financing their care with proceeds from the sale of their homes. If you’ve owned your home for a long time, there’s a good chance its value has increased significantly since you bought it.

You don’t necessarily have to sell your home to tap that equity, either. If you want to remain in your home, a reverse mortgage could provide the funds you need for in-home care. You must be at least 62 and either own your house outright or have paid off most of the mortgage to qualify for a reverse mortgage. In 2023, the maximum you can borrow using a federal Home Equity Conversion Mortgage, the most popular type of reverse mortgage, is $1,089,300. You can take a lump sum, open a line of credit to tap whenever you choose, or receive monthly payouts — or you can choose a combination of those options.

The loan comes due when you die, sell the house or move out for at least 12 months. However, if your spouse is a co-borrower and you go into a nursing home, he or she can continue to live in the home and receive loan disbursements.

Contribute the maximum to a health savings account

If you’re still working and your employer offers an HSA, make use of this tax-advantaged vehicle to save for health care costs in retirement. In 2023, you can contribute up to $3,850 if you have individual health insurance, plus $1,000 in catch-up contributions if you’re 55 or older. The maximum contribution for workers with family coverage is $7,750. Those maximums will rise to $4,150 ($5,150 if you’re 55 or older) and $8,300, respectively, in 2024.

Contributions are pretax (or tax-deductible if you’re self-employed), the funds grow tax-deferred, and you can take tax-free withdrawals for a variety of medical expenses. You can’t contribute to an HSA once you sign up for Medicare, but you can use money in the account to pay for your out-of-pocket medical costs, including long-term care. To qualify for an HSA, you must be enrolled in a high-deductible health plan, which in 2023 is defined as one with a deductible of at least $1,500 for single coverage or $3,000 for family coverage.

Buy a deferred income annuity (DIA)

With this type an annuity, as with an immediate annuity, an insurance company will provide you with monthly income for the rest of your life in exchange for a lump sum. In this case, though, you choose when the payments will start — at age 80, for example. Some retirees invest in deferred income annuities (DIAs) to ensure they won’t run out of money in their later years, but a DIA can also provide guaranteed income for long-term care.

Because payments start much later than they do with an immediate annuity (and some policyholders die before payments begin), the payments are considerably higher than those for immediate income annuities. For example, a 65-year-old man who invests $100,000 in an immediate annuity will receive about $607 a month, compared with $2,458 a month if he purchases a deferred income annuity that starts payments when he turns 80.

You can invest up to $200,000 from your IRA or 401(k) account in a type of deferred income annuity known as a qualified longevity annuity contract (QLAC) without having to take required minimum distributions when you turn 73. The taxable portion of the money you used will still be taxed when you start receiving income from the annuity. But the tax bite will be delayed if you postpone receiving income from the QLAC until you’re in your mid seventies or eighties.