The 10 Myths About RetirementMonday, July 8th, 2013
Myth #1: You will not spend as much money during retirement as you spend now.
The general rule of thumb is that you will need approximately 70% of your pre-retirement income in order to maintain a lifestyle similar to that which you currently have. This may be true if you plan to live similarly in retirement. However, when you retire, you will have more free time for travel, leisure activities, hobbies, etc. In addition, medical expenses will increase at a faster rate than they likely did during your pre-retirement years. Also, your overall tax rate may not drop very much.
Myth #2: I will downsize my lifestyle in retirement.
One reason that retirement expenses might not fall is because people incur new financial obligations that they did not expect. Active retirees have two or, in some cases, three condos or homes so they can spend time near their kids and grandkids. Many of our clients have housed their grandkids, paid for college tuitions, or made other choices with big financial impacts.
Myth #3: My retirement years won’t last all that long.
Currently, if you are age 65 your life expectancy is approximately 21 years; that’s a lot of time. Plus, you may live longer than you may think. A “life expectancy” of 21 years means you have a 50% chance of dying by year 21, and a 50% chance of living longer.
Myth #4: You can afford to start planning for your retirement a few years before your retirement date.
It’s never too soon to begin planning for your retirement. Time is one of the most powerful tools in the accumulation of wealth. The sooner you start to accumulate assets and plan for your retirement years, the better. Starting sooner means you will have to set aside less each year in order to achieve the same objective.
In order to achieve your financial objectives, you need to have an active savings and investment program. This should be geared not only for your retirement years but also for the large obligations you believe will be coming in the future, such as college funding, weddings, etc. You should start to discuss and set specific goals for your financial independence at least 25 years ahead of time.
Myth #5: Social Security will provide enough income for my retirement years.
The fact is that Social Security accounts for approximately 38% of the average retiree’s income. Social Security should be considered a supplemental benefit to your retirement financial planning and not the foundation on which it should be built.
Although benefits have been increased since Social Security was created and may continue to occur, it is more likely they may become less generous than they have in the past. In addition, the age that you must reach in order to receive full retirement benefits is increasing over the next few years. Thus, it is becoming ever more important for you to accumulate your own funds, in addition to whatever government programs can provide.
Myth #6: I have a pension to provide for my retirement income, so I don’t need any additional savings.
The truth is companies have been eliminating or changing the rules on plans over the past decade. Relying only on a pension can be a costly mistake.
Myth #7: Medicare will take care of my health insurance.
Typically, Medicare pays less than half of a retiree’s medical bills, including costly prescription drugs. Also, you usually cannot start collecting this until age 65, so if you retire early, you will be exposed to high private insurance and medical costs for the interim period. In addition, many employers are cutting back on promised medical coverage for retirees, so you can’t necessarily rely on those plans to cover the gaps in Medicare.
Myth #8: I can use the equity in my home to add to my retirement income.
The first question is whether you have the equity in your home that you anticipate. Since 2008, prices of homes in many parts of the country have dropped and not recovered. Equity for many homeowners was wiped out, so downsizing might not bring in money for retirement spending. Also, using a home equity line of credit for retirement spending is a risky way to finance your lifestyle. In addition, other costs to maintain your home such as property taxes, repair costs, etc., will tend to increase.
Myth #9: My children will be self-sufficient by age 25.
The fact is many children are living at home after college because the cost of housing is high or they are going to graduate school. The squeeze can come from both ends: Your parents may need your financial support in their later years.
Myth #10: Money is everything when it comes to retirement planning.
Nothing could be further from the truth! While money is important, it is the lifestyle decisions that should drive your plans. Money can finance the lifestyle you seek. That’s why starting early with a plan is so important.