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Will 2025 be the year you retire? Well, maybe not. For many people looking to quickly end their professional careers, retirement can be much more complicated than they think.
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Making savings a habit is important, but if you’re hoping to retire in 2025, some unforeseen factors can derail your plans. This is a list of the most important challenges you are likely to face.
Rising medical costs
Health care issues in the years leading up to retirement are often the most difficult to resolve. According to research from Fidelity, the average 65-year-old needs about $165,000 (after taxes) saved for retirement just for medical expenses, but many Americans don’t have that at all.
To make matters worse, health care costs are rising faster than overall inflation. The Centers for Medicare and Medicaid Services (CMS) projects that national health care spending will increase at an average rate of 5.6% each year from 2023 to 2032.
This means that even in 2025, much of the health savings retirees have in mind will be at past prices, not future prices.
To plan for these risks, you should plan for increased costs in your retirement budget and save at least $165,000 for medical expenses alone.
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inflation and cost of living
In 2022, the inflation rate reached 9.1%. For retirees, this means the value of all their savings has been significantly reduced. Even basic necessities such as food, utilities, and transportation are becoming more expensive, putting people on tight retirement budgets in a tight spot.
This high-inflation environment means you may need to delay your retirement plans because prices are so high. Furthermore, although Social Security benefits are indexed to inflation, they have not kept up with rising inflation.
For example, in 2022, Social Security benefits received a cost-of-living adjustment (COLA) of 5.9%, which was significantly lower than the inflation rate of 9.1% in June of the same year. This caused dissatisfaction among retirees, many of whom were living solely on these benefits without further support.
Market volatility and economic uncertainty
People nearing retirement age are especially vulnerable to fluctuations associated with the stock market. Also, in 2022, the S&P 500 index fell 19.4%, its worst performance since 2008 based on historical data.
In particular, if you choose to retire at the beginning of a bear market, you risk a chain of returns. This is the risk of withdrawing and cutting back on your savings during a market decline.
Economic uncertainty is closely related to stock markets and bonds, which are typically considered conservative and safe securities. Rising interest rates have caused bond prices to fall, posing a problem for retirees whose only stable income comes from bonds.
Especially if you’re nearing retirement, it’s important to have a diversification strategy to withstand market shocks.
Social security uncertainty
Social Security is an important source of income for most retirees. But the future of that program is uncertain. By 2034, reserves could be depleted and benefits could be cut to 77% of promised benefit levels, according to the Social Security Administration’s 2023 Director’s Report.
So if you’re considering 2025 as your retirement date, plan to significantly reduce the Social Security payments you receive over the next 10 years.
Although the system is unlikely to disappear completely, future generations of retirees may face greater pressure to rely more on personal savings and other sources of income to support themselves.
This uncertainty complicates retirement planning, so it’s important to have a solid financial plan that doesn’t rely solely on Social Security.
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This article originally appeared on GOBankingRates.com: 4 unexpected challenges you’ll face if you want to retire in 2025
