When you begin to look at retirement from any age, whether you’re 25 and planning ahead (awesome!) or 50 and are thinking.. Hmm.. I wonder what I should do?
You’ll hear from a number of different sources, including this one, information that’s spot-on and some that’s more of an old wives tale. One of big problems with listening to any type of advice is it at one point in time it may have been true. Times change, laws change and definitely people change.
With Social Security in the news lately we’ve taken the approach in this household with retirement planning by not counting on Social Security. We just don’t feel it’s likely to get much of anything when the time comes for us to ‘retire’. More than likely, we’ll be looking for ways to supplement our income. And in one case, that has already begun. That’s a post for a different day, however.
This article is going to go through some of the most popular retirement myths that abound. No, I’m not talking about Elvis having retired and is now flipping burgers in a Memphis suburb (everyone knows he’s in Amarillo).
#1: Any retirement target-date fund will allow you to “set it and forget it.”
Target-date funds are pretty appealing. I’ve looked at those for my own planning but haven’t pulled the trigger. I prefer a more active role in managing the finances. Choosing this route may give people a false sense of security. The idea of a fund automatically adjusting your mix to a more conservative approach as you near the target date sounds good, however it’s not a panacea.
A February 2012 review by the SEC found that exposure to stocks in target-date funds can vary as little as 25% to as much as 65% from the same year. Before you invest in one, understand how the allocation changes over time. You also need to know how much and when it turns the most conservative, and whether you’re paying more in fees than with similar target funds. The fees, like the stock exposure, can vary widely between funds.
#2. I can hold off on retirement savings until other things are taken care of.
Wrong! There is ALWAYS going to be “something else to take care of” during your life. Anything from buying that first home, to saving for college or paying for your kids wedding(s), The earlier you start the more you can utilize you best friend in retirement planning: Time. The best time to start saving is on Day one of your first job. The next best time is after reading this article.
#3: You’ll be able to make up a savings shortfall by retiring later or working part-time in retirement.
That’s not a plan. Forty percent of retirees surveyed by consulting firm McKinsey & Co. said they were forced to stop working earlier than they had planned, citing health reasons, having to care for a spouse or family member, or a layoff.
As of this writing, we’re beginning to see an economy returning to health. However, a job loss can still be catastrophic for the older worker. According to a March 2013 article by AARP, people age 55 and over currently spend an average of more than 44 months on unemployment! Younger job seekers are at an average of 34 weeks.
So don’t take it for granted you’ll be able to make up for years of failing to save enough on the back end of your working life.
#4. Medicare will take care of almost all your health care needs.
Today, Medicare covers around 50% of health care costs for it’s enrollees. Obamacare will affect these numbers and coverage, as well as potential changes to Obamacare. Time will tell on this one. However, our planning, and what I would suggest for others, is plan as if you’re on your own. According to a study by Fidelity Investments, a 65-yr old couple will spend $240,000 on medical expenses through their retirement. Much of that in their later years. The sooner you begin planning, the better off you’ll be later. One aspect of your retirement toolkit should be the Health Savings Accounts (HSA).
Combined with a High Deductible Health Plan (HDHP), HSAs allow you to save pre-tax dollars for medical expenses. The bonus here is that it’s portable and stays with you after you leave your employer. If you’re young and healthy, taking money out for an HSA will allow your savings to compound over time and provide a huge relief later in life, when you may hit that #240k in expenses. (Remember, that’s in today’s dollars. 30 years from now, that number is going to be drastically different).
#5: You should rely heavily on bonds rather than stocks as you get older.
This has been pretty common advice over the years. Times have changed since this was more commonly true. Retirements now last more like 30 years, rather than 15 or 20. Retirees are more active. Gone are the days of shuffleboard. You’re more likely to see a 65 year old sky-diver now than ever before. Relying on Bonds now when the government is loaded with debt and T-bills don’t have that bright of a future is pushing this myth out the door.
Financial Advisers recommend keeping 110 (or 120) minus your age in stocks. So a 50 year old should keep 60% in Stocks. As you age up, decrease that percentage. A 60 year old should have 50%.. I’ll leave the rest of this math test to the class for homework.
#6: You can claim Social Security early and still get full benefits later.
Current law allow you to apply for benefits as soon as eligibility begins at age 62. You’ll be able to receive monthly deposits immediately. But when you claim early, your benefits will be 25 % less than if you had waited until your full retirement age. Income will be between 75 to 80 % less than if you’d been able hold off until 70. That’s a huge difference for 8 years difference. Check out the AARP’s Social Security Q&A tool to see some answers to common questions.
If you have serious medical problems, or a family history of a shorter life, it might make sense for you to take the income earlier. If you’ve done a good job at taking care of yourself, or have been blessed with a good set of genes, the longer you wait, the more you are eligible to receive… assuming Social Security is around.
#7: You’ll need far less income in retirement to maintain the same standard of living.
Surveys of retirees have found that many spend as much or more in the early years of retirement than before they retired. This aspect of retirement planning requires more thought and discussions with retirement advisors. Your planning at age 25 might be different when you’re 45. People Change, habits change and family structure changes. Take the time to analyze what you expect to do in ‘retirement’ and revisit that often.
How are you doing in your retirement planning? Any other myths you’ve heard about?