Most people have a lot pre-conceived notions about retirement—some of them true, some of them false. I put together a list of 10 of the most common ones I hear on a daily basis so you can test your knowledge about how to put yourself in a great position to retire in comfort and grace.
- Most people retire before reaching full retirement age.
True. About 44 percent of workers take the benefit as soon as they are eligible, at age 62, and nearly 75 percent of retirees take benefits before full retirement age. It's something I try to advise all my clients about. Clients can claim Social Security benefits early, at your full retirement age (currently 66, for workers born between 1943 and 1954), or delay claiming until as late as age 70. If you take benefits as early as possible, you'll see about 25 to 30 percent less each month than you'd get at full retirement age. If you wait to age 70, you'll receive about 55 percent more monthly benefits than starting at 62. And if you live to age 81, you will likely have received more total benefits by waiting.
- To support your lifestyle in retirement, you’ll need 100 percent of your pre-retirement income.
False. Once you stop working, you will stop saving money to retirement accounts, so you reduce your monthly spending by 20 percent. Your tax rate could be lower, so that’s a savings. Other expenses might be lower, like commuting costs and dry-cleaning costs. You may even save money on food, because you'll have more time to compare prices in the grocery aisles and to prepare meals at home. Retirement planners generally recommend saving enough to cover 70 to 85 percent of your pre-retirement income.
But if you plan to take that around-the-world cruise or buy a place in Florida, you might be spending more money in the first couple years of your retirement. That’s why some professional advice could be really helpful.
- In comparison to your final salary, your nest egg should be twice as big.
False. Assuming you intend to retire at age 67, aim to accumulate savings equal to 8 to 10 times your annual salary. Together with Social Security benefits, that should be enough to replace about 85 percent of your preretirement income. If you have other sources of income, such as a traditional pension or a part-time job, or if you plan to significantly reduce your spending in retirement, then you can get by with saving less.
- The longer you delay taking Social Security, the more likely you’ll be cheated out of your fair share.
False. Quite the opposite. Whether you take benefits early or wait until 70, you'll end up with the same dollar amount before you die, assuming you die at your projected life expectancy (as determined by Social Security actuaries). There is no history of reducing Social Security benefits for those currently receiving benefits. Any time there have been adjustments to the Social Security formula it’s affected people who are currently 10 years away from claiming benefits.
- Once you file for Social Security, you can’t change your mind.
False, sort of. Within 12 months of first claiming your benefit, you can withdraw your application by filing Form SSA-521. You'll need to repay all of the money you received, including any spousal benefits. You can then restart benefits in later years, for a bigger amount.
- Stocks are great investments when you’re young, but they are way too risky for retirees to own.
False. Stocks do carry risk, but given today's longer life spans (a 65-year-old man can expect to live another 19 years, on average; a 65-year-old woman can expect to live another 22), you'll need to invest for growth well into retirement. A professionally managed portfolio of stocks and bonds can provide reliable income and growth to keep ahead of inflation. The key is to have professional advice about how much income you will need, when you will need it and how long you can reasonably expect to need that income. Again, some professional advice based on the details of your situation will be very helpful.
- Social Security is going broke.
False. Social Security may eventually fall short of the money it needs to deliver full benefits, but it's not likely to go broke altogether. Here's the deal: Social Security is mostly funded by payroll taxes and taxes on Social Security benefits. In recent years, those revenues have not been enough to cover full benefits, so the system has used interest on its reserves to close the gap. The reserves are projected to run out in 2034, at which point tax revenue will generate enough to cover only 79 cents for every dollar of scheduled benefits. Chances are strong that Congress will come up with a way to fix the system before that happens. Remember, most people receiving Social Security benefits are the sort of people who vote, so it’s not likely that Congress would leave them holding the bag.
- You and your spouse should plan on spending more than a quarter of a million dollars out-of-pocket to cover health costs in retirement.
True. Medicare doesn't cover everything – far from it. Recent estimates project that a couple who are each 65 and live to their average life expectancies – 84.3 for a man and 86.6 for a woman – will need $280,000 to cover health care costs in retirement. This is yet another area where some professional advice will be very helpful.
- If you’re short on savings, you can always work longer.
False. You may not be able to stay on the job even if you want to. Health problems are the biggest reason people find themselves retiring ahead of schedule, according to the Center for Retirement Research at Boston College, followed by involuntary job loss. Older workers generally have more trouble finding work after a layoff than younger workers. Changes in family circumstances also play a role in retiring sooner rather than later. If your spouse retires before you do or a parent moves into your home, the chances increase that you'll leave the work force before your scheduled departure.
- If you follow the “4 Percent Rule” for withdrawing from your retirement accounts annually, you’ll probably be set for life. No worries about running out of money.
False. According to this popular retirement-spending strategy, you can safely take 4 percent of your total portfolio in the first year of retirement and the same amount, adjusted for inflation, every year afterward. But the rule, based on an analysis of returns over a series of 30-year periods starting in 1926, doesn't reflect current and future conditions. Entering retirement in a bear market and taking 4 percent from your nest egg could cripple your portfolio. Rather than follow the rule blindly, consider lowering the percentage or skipping the inflation adjustment in years when the market performs poorly. On the flip side, you might be able to increase the percentage of your withdrawal when the good times roll.
If your retirement IQ is not quite where you would like it to be, or if you just would like to get some professional perspective on the journey toward retirement, I suggest you set a meeting with a CERTIFIED FINANCIAL PLANNER™ professional. If you meet with a planner who is always an advocate for the client– a fiduciary advisor – and only works for the client – a fee-only advisor – you can be confident that the financial advice you get is focused on your best interests and is a good fit for your complete situation.
CFP® professionals take a multi-faceted approach to your financial planning process that includes budgets, risk protection, retirement planning, investment management, taxes and estate planning. All these related aspects of your financial life are what really matter when it comes to reaching your goals and retiring on time.
A CFP® professional can help you create a financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared in the event that you have to leave work earlier than you expected.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.