What You Need to Know About Retiring in 2022

This year has an ongoing global pandemic, a war in Ukraine, and skyrocketing inflation. According to Fidelity’s State of Retirement Planning Study, 1 in 4 Americans say they are now less confident about their retirement plans than before they'd heard of COVID, and 71% say they are “very concerned” about inflation’s impact on retirement preparedness. If you’re looking to retire this year, you may feel fearful too. Here are some things you need to know.

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It’s important to be aware of what’s going on now, but retirement lasts decades for most people — and even if you retire at the best of times, there are bound to be changes. “Quieting the external noise and focusing on planning and disciplined investing behavior will limit investor mistakes and allow for a more enjoyable retirement,” says Matthew Fleming, a certified financial planner and senior financial adviser with Vanguard Personal Advisor Services. 

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There are many things out of our control. Focus your energy on things you can. “Create clear, appropriate investment goals; choose a mix of assets meant to achieve those goals; keep investment costs low, and maintain perspective and discipline to position portfolios for long-term success,” Fleming says. 

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Whenever you invest, and especially as retirement draws near, it is important to assess your risk tolerance and how aggressive your investments need to be to reach your goals. Making rash decisions in a changing market is almost always sure to lose a lot of money. 

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Fidelity’s general guidance is to try not to withdraw more than 4% to 5% from your retirement savings yearly once you’ve reached retirement, says Rita Assaf, vice president of retirement and college leadership at Fidelity. Some financial professionals even recommend a more conservative 3.3% withdrawal rate. Surprisingly, according to Fidelity’s recent study, 20% of Gen Xers and 15% of boomers thought a financial professional would recommend a withdrawal rate of 10% to 15% of retirement savings every year. “That’s not the case at all and could lead to depleting one’s retirement savings far too quickly,” Assaf cautions. 

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Based on what Fidelity knows about retirees and their satisfaction once they get to retirement, most aren’t spending as much as they could be “and yet they’re feeling pretty good about where they are – satisfied with retirement and at the same or a higher standard of living compared to pre-retirement,” Assaf says. Maybe this will ease some inflation-induced stress for soon-to-be retirees. 

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If inflation woes have you down, take heart in knowing that most experts don’t expect it to last. "While there are more forces that suggest inflation could run higher than run lower, we don't expect a return to 1970s-like hyperinflation," says Jake Weinstein, a research analyst with Fidelity's asset allocation research team. "Market indicators suggest that over the next 20 to 30 years, inflation will be somewhere between 2% and 3%.”

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Diversifying a portfolio to hedge against inflation and market variations is key to successful retirement funding. Besides investing in equities such as U.S. and international stocks, Fidelity recommends adding some inflation-resistant fixed-income investments. These might include Treasury Inflation-Protected Securities, shorter duration bonds, high-yield bonds, investment-grade bonds such as corporate bonds or mortgage-backed securities (which typically provide higher yields than Treasurys of similar duration), and/or international bonds. Real estate can also be another way to diversify. 

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Investors often say, “cash is king” — if you have cash on hand, you can buy more assets when prices are low. If you hold too much cash, however, buying power decreases with time. "Unless our assets are growing at the same rate as inflation or greater, we're going to feel like we can't afford as much a few years from now," says Naveen Malwal, an institutional portfolio manager at Fidelity's Strategic Advisers. "Adding more to cash could leave you more exposed if that cash is not keeping up."

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Once you reach age 50, catch-up provisions allow you to increase your tax-advantaged savings in several types of retirement accounts. For a traditional or Roth IRA, the annual catch-up amount is $1,000, boosting your total contribution potential to $7,000. This can be a great way to pump up a nest egg for retirement in a tax-smart way, Assaf says. 

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If you’re working part of this year, you can still take advantage of tax-deferred savings. The IRS increased the limits for 401(k) contributions to $20,500 for 2022. This allows you to save more while decreasing your 2022 tax bill. 

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Another tax-advantaged savings option you can squeeze in before retiring is a contribution to either a Roth or Traditional IRA. The income phaseout ranges for these retirement accounts are increased this year. Even if you weren’t eligible before, you might be now. 

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The Social Security Administration is implementing a 5.9% cost-of-living increase this year. That means you may get more in monthly Social Security payments than expected, hopefully covering some of inflation-induced price hikes.  

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For retirees turning 62 this year, full retirement age is now 67. If you plan to retire before that age, you have decisions to make. You’ll need to determine if it is worth it to take an earlier, reduced payment amount or delay claiming Social Security until full retirement age. 

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For those approaching retirement, the longer you can wait, the more time you have to build up savings. “Waiting until you are at least entitled to the full Social Security benefits can help you increase your monthly benefit. So if you can afford to, it can pay to hold off — and also, don’t forget about the possibility of working part-time in retirement,” Assaf says. 

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Inflation has raised costs dramatically for most expenses. But have you looked at essential expenses such as housing, food, and transportation and found yourself confident you can keep covering them, no matter what? Make sure you can before anything else. “You probably have lots of activities planned for retirement, including things such as travel or establishing a second residence. At this time, it might be a suitable moment to move slower or move to a more defensive position regarding your big investments,” says Jerry Patterson, president of Fidelity Investments Life Insurance.

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If you claim Social Security payments before full retirement age, there are limits on how much you can earn through work without a benefits reduction. People younger than full retirement age during all of 2022 cannot earn more than $19,560 (up from $18,960 in 2021), without seeing a reduction. If you reach full retirement age during 2022, you can earn up to $51,960 (up from $50,520 in 2021) before payments are reduced. But if you wait to claim Social Security after reaching the full retirement age, you will never have benefits reduced based on work during retirement. (If your benefits are reduced, you will get a higher benefit amount after reaching full retirement age, so you don’t truly “lose” the money — but you can’t count on it before full retirement age.)

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Medicare Part B provides valuable outpatient coverage to seniors. Contrary to popular understanding, though, not all Medicare coverage is free. Standard premiums for Medicare Part B will increase 14.5%, to $170.10 this year from $148.50 in 2021. you’ll also be subject to higher premiums based on how much you earn. Medicare Part A is free to most eligible individuals, but inpatient hospital deductibles for Medicare Part A are also increasing. 

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Before you retire, advisers recommend having enough savings to cover medical expenses. Health care costs continue to rise, especially as insurance companies and providers deal with an ongoing coronavirus pandemic. Health care is likely to be one of your largest expenses in retirement, and long-term care needs are common for older adults. Fidelity estimates that an average retired couple age 65 in 2021 may need approximately $300,000 saved (after tax) to cover health care expenses in retirement.

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Another consideration for retirees: buying long-term care insurance. Even if you have family, the coronavirus pandemic has shown us ‌it may not always be possible to rely on them for care. If you buy long-term care insurance when you are younger, you will typically have lower premiums. Long-term care insurance can also help protect assets if you would like to leave a legacy for your heirs. 

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Before you retire, Fidelity has free tools you can use to check your retirement plan. These tools will help you feel more confident in your ability to retire or help you improve your existing plan. The Fidelity Planning and Guidance Center analyzes your situation and provides suggestions for improvement. You can also calculate your retirement score by answering six simple questions for a snapshot of where you’re at. Finally, a retirement income calculator will help you determine how much money you could have each month in retirement.

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