Retirement Lies We Tell Ourselves

“When you were young, you wanted to live forever, now you’re afraid you just might.”
Anonymous

On December 11, 2006, the Wall Street Journal published a section entitled “The Retirement Lies We Tell Ourselves.” This article is a summary of what I consider to be the most important points in that article. It covers the biggest and most risky assumptions that people make when planning for their retirement.

Lie 1 — I'm Going To Work in Retirement

A number of surveys have shown that about two-thirds to three-quarters of baby-boomers expect to work for pay after retiring. It certainly sounds good; however, you may not be able to work in retirement. A study published this year by McKinsey & Co., found that 40 percent of surveyed retirees had to stop working earlier than planned as a consequence primarily of layoffs and poor health. Moreover, currently, just 27 percent of surveyed retirees had ever worked for pay while in retirement and only 12 percent of current retirees are collecting a salary.

Lie # 2 — My Home Is My Safety Net

Almost two-thirds of affluent baby boomers intend to finance their retirement by selling their homes. The home-as-a-piggy-bank strategy though may not be as easy or attractive as it first appears.

Most people have two options: trade down to a smaller, less-expensive home, or borrow against their equity.

Most Americans though wish to remain in their homes and communities as they age. Selling might sound good today, but when the time comes will you actually want to pack up and move?

Borrowing against your home, meanwhile, could be tricky. If interest rates rise in coming years, the value of your property could fall. And, with reverse mortgages, fees are high and many loans capped. A $300,000 home might yield $115,000.

Lie # 3 — I’m Going To Get A Pension, And It’s Safe

It’s one of the more mystifying assumptions in retirement planning: the firm belief among many workers that they will receive a pension check in retirement -- even though hundreds of pension plans nationwide are underfunded, and a growing numbers of companies are freezing or eliminating benefits.

According to the Pension Benefit Guaranty Corp., insured pension plans nationwide are underfunded by about $350 billion. And, even if the pension is insured, the annual cap on that insurance is currently set at $47,659.

If you’re lucky enough to be covered by a pension, you can check out the health of your plan at the Pension Benefit Guaranty Corp., web site www.pbgc.gov.

Lie # 4 — I Can Live On 70% To 80% Of My Pre-Retirement Income

Will you be able to live the life you want in retirement on 20 percent to 30 percent less income than you have right now? Most people don’t think about how they want to spend their time in retirement, and thus have no idea how much income or what size nest egg they will need to support themselves later in life.

The most telling evidence regarding income needs in retirement comes from current retirees. Fully 55 percent of surveyed retirees, according to research published by the Employee Benefit Research Institute, said they were living on 95 percent or more of their pre-retirement income.

There is however, one group of people who can safely follow the 80 percent guideline: If you’re saving 20 percent of your paycheck, then the 80 percent rule works just fine.

Lie # 5 — I’m Going To Get An Inheritance

Yes, you might just get that inheritance, but the chances are good it will be smaller than you think. As much as $41 trillion could be passed down through estates in the U.S. during the next five decades. But then there’s the fine print. About two-thirds of the amount transferred will be concentrated among the wealthiest 7 percent of estates. And a good chunk of the money will go to taxes, settlement costs and charity.

Additionally, as boomers parents are living longer, much of the money will go to annuities, health costs and long term care expenses. Among boomer households that had received an inheritance by 2004, the median value was $49,000.

Lie # 6 — My Taxes Will Go Down In Retirement

They might. But chances are good you’ll end up in the same tax bracket, if not a higher one once you leave the office. The explanation is tied to the likely source of income in retirement.

With fewer employers today offering pensions, many people in later life will turn to their 401(k)s and IRAs for the bulk of their money. Any dollars withdrawn from these accounts (with the exceptions of Roth IRAs) are taxed as ordinary income.

In short, if you need as much money in retirement as when you were working, you could end up in the same tax bracket.

Additionally, if you pay off your mortgage prior to retirement—normally a prudent move—you may find that you may no longer itemize your deductions on your income tax return. Furthermore, as much as 85 percent of your Social Security benefits could be taxable and in many areas, property taxes are continuing to climb.

The Solution

There’s no doubt about it, retirement is fraught with unknowns and can be counted on to be much more expensive than anticipated. However, the solution to the type of retirement you dream of isn’t complex. Save more.

As an Investment Advisor, I see many different kinds of clients. Some put emphasis on saving and some don’t.

If you haven’t made your 2006 contribution to your IRA or other retirement savings account, what are you waiting for? Please don’t bury your head in the sand when it comes to securing your retirement future. The stakes are just too high not to take action.

If you’d like to meet with me to map out your retirement saving plan, just give me a call. There’s nothing I like better than helping clients attain their financial goals.

Invitation

If you’re not a client yet, and you’d like to explore the option of developing a professionally managed investment portfolio comprised of no-load mutual funds, please give me a call.

I’d be happy to sit down with you and explain how as a fee-only investment advisor I can assist you in meeting your financial goals.

Marshall Sitarik - CFP
Ph. 407-977-3800