INVESTING | OCT 1, 2021

5 Retirement Myths

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Jim Henry

It’s been said that “facts are stubborn things.” Myths can be equally stubborn, but we can use facts to do away with five myths about retirement that never seem to die.

The first myth is that setting your asset withdrawal rate for retirement is a one time thing. That is, planning that you can take out the often recommended 4% a year without dipping into your principal, and then never revisiting that percentage. So much can happen between now and the day you quit working that it’s prudent to periodically redo your calculation.

If you’ve already retired, or about to be, consult with your financial advisor and review your anticipated withdrawal rate. Take into account how stock prices and inflation may impact your returns. You may have to make adjustments to your retirement income.

Younger folks might want to go with a safer withdrawal rate of 3% to 4%, but it could be higher if you faithfully contribute 10 to 15% of your income to your retirement plan. Again, meeting with your advisor will help you set up a strategy that meets your goals and needs.

The second retirement myth is that Medicare will cover all of your health care costs in retirement. It’s a very helpful program for many retirees, but it was never intended to cover 100% of health care costs. Deductibles and copayments can be high and Medicare doesn’t cover dental, vision and hearing conditions.

You need to factor in the cost of a Medigap policy or a Medicare Advantage Plan from a private company to supplement Medicare. That will cover the cost for Medicare Parts A, B, and C, but you also want to add Part D coverage for prescriptions.

Perhaps the biggest retirement myth is that the Social Security program will collapse and not be there for you when you retire. While the program definitely has solvency issues that need to be faced, if you’re in or nearing retirement, they’re not likely to affect you.

It’s now estimated that, without changes, Social Security’s financial reserves will be able to pay full benefits until 2034. At that point, benefits would have to be decreased by about 25%. Is that likely to happen? Probably not.

It’s far more likely that Congress will overcome gridlock and implement steps to correct the problem, either by increasing payroll taxes or raising the full retirement age, or both.

However, keep in mind that Social Security was only designed to cover about 40% of your retirement income. That’s why it’s vitally important that you begin early and save as much as you can to provide the other 60%.

If your employer offers a 401k plan with matching contributions, put in enough to get the maximum match. Then put additional funds into a Roth IRA, where your withdrawals later will be tax free.

Another retirement myth is that you can simply keep working as long as you need the money. The facts don’t support this and the COVID pandemic is an example. A recent survey showed that 7% of those responding retired earlier than expected due to the pandemic. Another 11% said they will now retire sooner than they had planned.

Here are two more statistics to take into account. Nearly 25% of people in their 20s will become disabled before reaching full retirement age at 67 and nearly 70% of people over 65 will need long term care at some point during retirement. The bottom line, save as much as you can, as early as you can, and then get long term care insurance when you near age 60.

The last retirement myth is that you can simply alter your lifestyle in retirement so you won’t run out of money. Trimming your budget is always a wise idea, but you may not find it as easy as you think for several reasons.

You’ll have more time on your hands to socialize, which can lead to overspending. There’s also a temptation to take more trips, especially if grandchildren live out of town. You might want to pursue a hobby that leads to unplanned spending.

Then there’s inflation, which Ronald Reagan called, “the cruelest tax of all.” Right now, the Federal Reserve is predicting 2% annual inflation for several years into the future. That might not seem like much, but that’s a compounding rate that will erode the buying power of your dollars over time.

Again, your financial advisor can help you come up with a strategy that takes inflation into account and that will likely involve keeping some of your portfolio in the stock market even after retirement.

Now you have the facts you need to prepare for whatever lies ahead.

Listen to th e related podcast on this topic.

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