“I can’t wait to retire!” Have those words ever come out of your mouth? Oh, the thought of divorcing that demanding, unreasonable boss; doing what you want when you want; burning all the bridges you never intend to cross again. It’s the payoff for all those years of hard work.
Unfortunately, the retirement dream we’ve built in our minds may not be the reality we’ll encounter. Today’s retirement will be different than it’s been for any preceding generation and there are retirement myths that should to be demolished.
My spending will go down after I retire
That may have been the case in the past, but going forward you can expect to spend as much or more than you did when you were working. A study by the Employee Benefit Research Institute found that almost half of retirees spend more in the years immediately after retiring. And the Investment Company Institute discovered that 90% of American workers maintain or increase their spending after claiming Social Security.
I’ll be in a lower tax bracket when I retire
Since you may need as much or more income in retirement than you did while you were still working, there’s not much credibility to the idea your taxes will go down.
Top tax rates have been cut in recent decades, but the U.S. has a serious debt and spending problem, so the odds are good that tax brackets may go back up.
And you have to consider all the tax-deductible money you put away into 401k accounts, IRAs and other retirement vehicles that become fully taxable as ordinary income when you take it out, or you’re forced to take it out at age 70 ½.
In addition, older Americans often have fewer federal tax deductions and fewer dependents to claim, which could mean more of your income going into Uncle Sam’s outstretched hands.
When I retire, I’ll put all my money in CDs and bonds to be safe
That was a reasonable investment plan when interest rates were high and people only lived 10-15 years after retiring. Today though, people can live 30-40 years after retirement, so money needs to last a lot longer. A 4% inflation rate will cut purchasing power in half in 18 years. Your money has to double just to keep even.
As for safety, if the Government can’t pay its debts, which is what bonds are, they’ll raise your taxes. Maybe that is safety to you. And those FDIC insured CDs are not nearly as insured as you think. The FDIC has $25 billion to pay claims. On any given day banks are holding $9 Trillion in insured deposits. If a disaster occurs, FDIC has approximately 0.2% of the money necessary to cover deposits.
I plan to withdraw 4% annually from my retirement accounts
For decades, experts have recommended withdrawing 4% from your retirement accounts when you retire and then increase that amount by inflation each year and you could expect your money to last 30 years. However, today, that plan is one that can drain you rather than sustain you. At issue is an expected low-return environment on investments and people living more than 30 years.
David Blanchett, head of retirement research at Morningstar says, “A problem with this 4% rule of thumb is that it’s based on historical long-term averages. This isn’t to say 4% isn’t a safe initial withdrawal rate for some retirees since it still can be. It’s just that 4% isn’t nearly as safe as it used to be.”
Social Security will cover most or all of my retirement income
Social Security is in trouble and decreased benefit payments are possible. Everyone’s annual Social Security Statement contains this paragraph:
Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 79 percent of schedule benefits.
A similar statement has appeared on annual Social Security statements for more than 20 years. The farther you are from retirement the less you should count on Social Security.
My inheritance will take care of my retirement
Your parents may have a sizable estate you expect to receive when the last one dies. But there are lots of things that can wreck those plans. First, your parents may live longer than you expect. Life expectancies have increased dramatically over the last 20 years. They may be the victims of investment fraud or a stock market crash. They may end up in bad health and spend most of their money for care. They may go on a spending spree because they’ve got the money to do it. Or a surviving parent may remarry and leave everything to the new spouse; it’s been done. If you receive an inheritance, that’s great. But counting on it is tenuous.
Employer retiree insurance and Medicare will take care of my retirement healthcare
That may have been true in 1988 when 66% of employers provided retirees with healthcare benefits. Today, according to the Society for Human Resource Management, 19% of employers provide some type of retiree health coverage and 38% of those companies are considering elimination of retiree health benefits.
Medicare pays for some of your healthcare, but not everything. Medicare does not cover annual deductibles and co-payments for Parts A and B. It does not pay for prescription drugs. There is no Medicare coverage for vision, dental, or hearing. And Medicare does not pay for long-term care. If you want that type of coverage you have to pay for a Medicare Advantage plan, Medicare Supplement plan, or Medicare Part D.
I’ll retire when I want to
Half of U.S. workers retire before they expect to, according to the 2015 Retirement Confidence Survey from the Employee Benefit Research Institute. Of those, 60% leave the workforce early because of health or disability issues. Others leave because of a company downsizing or to take care of a family member.
Bonus Myth – I’ll have lots of free time
Nice thought, but probably not. I’ve never met a retired person who didn’t say, “I’m so busy now I don’t know how I had time to work.” For many, retirement becomes filled with the house “honey-do” list, hobbies, volunteer activities, family events, helping neighbors, and travel. You won’t have as much time as you think.
Planning for retirement may be a lot different than you thought, but planning is the key. Plan according to today’s realities with current information or you may find yourself singing these words from the song Yesterday When I was Young:
“The thousand dreams I dreamed, the splendid things I planned, I always built to last on weak and shifting sand…”