RETIREMENT PLANNING videos and books can be frustrating because of the conflicting advice from so-called experts. Often, these experts are outside the mainstream. They retired in their 30s, or saved 50% of their income, or claim to be living so frugally in retirement that they need to replace just half of their old salary.
I prefer to think more about average Americans facing the reality and challenges of planning for retirement in the real world. Let’s clear up some of the myths I’m hearing from these “experts.”
1. You need $1 million to retire. There’s no magic number other than the one that meets your needs. Imagine a worker with an annual income of $60,000 who retires at age 66. His Social Security will likely replace some 30% of his income. Add a spousal benefit and his income replacement reaches 45%. He doesn’t need $1 million in savings to replace the remaining income.
2. No way I can save enough to retire. For 80% of Americans, that is not true. It’s a matter of priorities—putting needs and savings ahead of wants and desires. Let’s say young adults save $100 a month and earn an 8% annual return over 40 years. At age 60 or so, their nest egg would be worth some $340,000 without ever increasing the $100 in monthly savings—which should never be the case.
Remember, you get help with saving through our tax laws and possibly from employer contributions. To get started, save your change every day—anything you can. Just do it. Once you accumulate a small nest egg, seek advice on how to invest it.
3. Social Security won’t be there for me. Yes, it will. I predict within 10 years it will be improved, especially for lower-income beneficiaries. The political rhetoric about Social Security’s demise is unfortunate because it scares people unnecessarily.
4. There’d be no problem if Congress hadn’t “stolen” the Social Security money. This falsehood has been circulating for years. From their start in 1937, payroll taxes above those required to pay benefits were invested in special U.S. Treasury bonds. Today, those bonds generate $70 billion in annual interest for the Social Security trust fund.
All payroll taxes—along with that interest—are used to pay benefits, and soon the trust will also gradually redeem its bonds to pay benefits. Once all those bonds are redeemed, full accrued benefits cannot be paid from payroll taxes alone. Congress didn’t steal the trust fund, but it sure didn’t do its job ensuring that the trust fund remains solvent.
5. I’m frugal and plan to live on 50% of my pre-retirement income. Some Americans are forced to live on a small income or even Social Security alone. Being frugal is fine, but why plan for that? For folks who failed to save, there’s no room for error, and I suspect no room for anything other than necessities. Most people need much more than half their old salary for an enjoyable, low-stress retirement.
6. My retirement expenses will decline as I get older. That’s the standard view supported by surveys, but it’s not my experience—and may not be yours. The nature of your expenses will change over time, but your total annual spending may not. If you’re fortunate, you’ll spend more on discretionary items like travel, entertainment, helping your children and so on. Overall, I submit there won’t be a spending decline, especially considering inflation. Long-term care, even at home, can be a real fly in the ointment.
7. When I retire, my saving days are over. Sorry, that’s not a good idea. Sure, you need to save less, but still something. You need cash in an emergency fund, and you’ll need to replace that money as it’s spent. The goal: Avoid paying large, unplanned expenses from the investments that you rely on for your stream of income.
8. Once I retire, I’m canceling my life insurance. Before you do, have you planned for your survivor’s income needs? A life insurance premium may be less costly than a survivor benefit arranged through a pension or immediate annuity, especially if the beneficiary is younger than the retiree.
9. I hear health care costs in retirement are more than $300,000. Those estimates include out-of-pocket costs and premiums over a retirement of 25 to 30 years. Don’t rely on one large number. Instead, look at your situation and think in terms of the annual expense.
Add up many ongoing costs over 30 years—property taxes, for example—and you’ll get a scary number. Once you qualify for Medicare, buying a Medigap supplemental policy can virtually eliminate out-of-pocket costs. Prescription drug costs can be an extra expense, however, and should be planned for.
The key to planning for your retirement is to plan your retirement and not one based on averages, medians or the advice of people who live on the financial fringe.