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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.
True, the program must be modified to remain sustainable. But there are numerous relatively painless ways to accomplish that over time. Nobody is going to cut the benefits earned or already being paid—nobody.
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.
Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.
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Richard, one additional point about Myth #2. Younger people may be more apt to save for retirement if they understand and appreciate the power of compound growth. Those who don’t understand may feel saving enough for retirement is futile.
have to go with chazooo on this one. widower for 4 years after 30 years together. both of us lost our immediate families along the way and chose to be childless. we were readers and walkers. never any interest in travel. because of an “asset pond”, instead of “income streams” we, and now i, don’t worry about inflation. a low grade lifestyle is both gratifying and easy to maintain. “sucking on lemons vs enjoying lemonade”, is my new t-shirt! t.u.!
One man’s myth is another man’s reality, or vice-versa, eh? I retired very early after 30 years and with a pension, having paid off the mortgage in 15 years, moving and downsizing to half the house to greatly reduce a ridiculous RE tax bill. Both of us are in good health which is the key retirement factor in my estimation.
Current inflation generates griping, but it hasn’t changed our lifestyle. We know we are fortunate, the gross income is less than before, but so are the expenses, and without “sacrificing”. We don’t eat cat food – it’s too expensive! Also, we are not supporting our adult children or grandchildren, apparently the ruination of many good retirements.
Some folks seem to prefer sucking on lemons to enjoying lemonade.
Thank you, Mr. Quinn. Most people do not realize that Social Security is supported by a dedicated tax ( FICA ) which on its own would support paying today’s benefits at around 70%. The trust funds were the result of the Greenspan Commission in the 1980s which foresaw the baby boomer bulge and increased FICA taxes to fund future benefits.
Actually the trust funds came into existence in the 1940. The Greenspan commissions sought ways to shore them up, but didn’t go far enough or more important set up a way to automatically adjust trust revenue to meet future demographic and other changes .. and here we are today.
#8 is an interesting one. Our term life policies end at ages 65 and 69. At some point in the next few years, I’ll have to elect either individual or +survivor benefit for my pension. I’ve always assumed I’d select the +survivor option and that our term policies would sunset, since we’ve raised our kids and have both locked in our pensions. But now I’m thinking I should at least do the math when the time comes.
Good common sense points. I think a lot of advisors and investment companies scare people on purpose as a marketing ploy. I also think expenses don’t correlate well with income. We spend the same amount in retirement that we spent when I was working. But that was only 25% of my last years income. We always spent whatever we wanted, but it was usually much less than our income.
About point 5: I’m frugal and plan to live on 50% of my pre-retirement income.
I’m somewhat but not excessively frugal, and I retired early with a pension that was 40% of my last year’s salary. I did part time contract work for three years or so, and later I drew a spousal benefit while I waited to reach 70, but it wasn’t until I was taking my full social security and RMDs that my income approached my final year’s salary – and that’s not allowing for twenty years of inflation. I lived comfortably and traveled extensively. Planning should be based on expected expenditure, not pre-retirement income.
I have to disagree on that point. Expected expenditures are tricky, variable or partially unknown, plus it’s a pain in the neck figuring it all out – maybe annually. If you reach 100% income replacement it’s pretty much figured out for you.
Have to disagree. Figure out your fixed and variable expenses and then budget for them. I have no pension, and only guaranteed income is social security , which will be the case for most recent and future retirees. No way do I need to have an income equal to my salary. Maybe those who want to travel a lot and spend more will need the same income they made while working. I also think it depends on your income, of course. Someone making hundreds of thousands a year or more will not need that much in retirement, unless they spent every penny they made while working and want to continue doing that. It also depends on your net worth. Someone with millions in investments, say $3 -4 plus, unless they spend like crazy, will not even have to budget. But planning based on expenses is much more reliable than planning based on previous income
Assuming you’re going to maintain basically the same lifestyle, perhaps. But I’m with mytimetotravel. Yes, much much is not knowable and it is a bit of a pain in the neck, but I’m all
for planning based on expected expenditure, with % of income replacement being a sanity check on the side.
Liked the article.
You certainly need to know the total of your living expenses, but that is not necessarily a budget. Perhaps if a major expense is eliminated right before retiring that might be a factor, but I still maintain the target should be 100% of base pay. Not many people agree, but that’s okay.
I think calculating using a percent of base pay is not useful. When I was working we lived on ~25% of base pay (not frugally either). We’re post retirement now living on slightly less.
I also was going to disagree with this one, but the qualification of base pay makes it a little closer.
I would be even closer in alignment if it said take home but even then,,,
In my case, I am saving approximately 30% of my take home pay and I have a few other expenses that could go away, will they be replaced with retirement ones, perhaps
I was thinking more of adding expenses in retirement rather than eliminating them, but my comment still applies, and we probably still disagree 🙂
Completely agree with first sentence and wasn’t suggesting a budget, just a more informed expectation.
I’m finding the same thing that you have, Richard. Heck I could claim we’re currently living on 55% of our income (which has grown a lot the past couple years), but the fact is that estimating expenses in retirement is really difficult.
We are in pre-retirement right now; I’ll probably retire in a couple years, my wife will work for a while after that. Our income and expenses are all over the place, many things have changed for both of us. I’m just trying to ensure we have roughly the same income as we did a couple years ago, when we were comfortably break-even.
But if you wait until then you may unnecessarily delay your retirement. I would not have retired when I did, and I would have missed out on a number of years of travel. Since I am currently unable to travel I am extremely grateful that I did not wait. I had tracked all of my expenses on Quicken for a number of years and did not find the calculation difficult. I paid off my mortgage, stopped saving for retirement and saw my taxes drop, all of which helped significantly.
Thanks Dick,
I agree with your above points and conclusions on these financial aspects of retirement planning. For me, the purpose and meaning factors of my retirement have surprised me the most in my initial stages of retirement since I stopped working last August. The various points of view of different writers regarding purpose and meaning have helped me on my journey. I am guessing the non financial aspects of retirement continue to evolve for all of us and, as you advise regarding the financial factors, will be unique to each of us.
Best, Bill
Certainly true. For me everything just fell in place, I never felt board, never seemed to have nothing to do. I didn’t plan my retirement beyond finances, just went with the flow and every day was filled with something or maybe nothing to do which at times is okay. Today is one of those days, but in a week we will be getting ready to go to Florida for a month or so.
You make several good points.
Regarding #1, it should be noted that the regressive nature of SS benefits means that the percentage of pre-retirement income replaced by SS decreases as income goes up. Could you apply the same assumptions you made for someone with an income of $60,000 to someone with an income of $100,000?
Clearly the replacement percentage from SS declines as income increases, but there are other variables too like planned lifestyle in retirement and income replacement that meets those needs. I used $60,000 because that was closer to the norm for most retirees
Well-spoken! That is a great list, Mr. Quinn.
Please allow me to start a new list about retirement realities, not myths.
I. $50k in expenses are approximately $80926.36* in 2022 due to inflation from 2000 to 2022 having been averaging 2.41%. [If someone might please finish this, or not, as there is a lot to be said on this point alone by people who are wiser than myself!]
*I used the average inflation rate per Google for this time period, not the actual sequence of inflation each of those years. I used a general internet compounding calculator to come up with the specific number. The actual expenses $50k in 2000 would be different for 2022. That’s for smarter people to figure out.
Good point. The impact will vary a lot person to person depending on how fixed your costs are, housing being key. The inflation of the past year had very little impact on us because not only were our housing costs fixed, but also we both work from home (very little gasoline usage, less need for dress clothes, etc.). For this reason inflation impacts may be mostly felt in food and perhaps healthcare costs only, and those costs vary as a percent of total expenses among retirees, especially healthcare. Also, folks that rent or need to travel are going to feel it more.
Good read. I agree with your list, especially 1, 3 and 6. With #6, as I hope to retire younger, I’m sure those first years my expenses will not decline. As you mentioned, travel and helping my kids will still be a sizable expense.
I easily agree with 8 of your 9 points.
I can’t let go of the thought (#4) that congress has raided Social Security to spend elsewhere.
The truth is, that it is impossible for a large country as a whole to “save” “money”. Money is a medium of exchange, not actual goods and services. In a large country, nearly all goods and services are consumed the year they are produced. You cannot put medical care and housing in a vault, and take it out 30 years later and use it.
So in a large country, when the demographics are favorable, the young people are going to live well, because they are supporting a relatively small number of retirees. In the 50s, large families were supported by one income, and a tiny SS tax paid for a small number of old people. But now, with a large number of old people, the goods and services produced by a smaller number of workers have to be shared with a massive number of retirees. Even if these retirees have “money”, they still have to compete to buy a limited amount of goods and services with those who are young and working.
This way of looking at things predicts that wages for labor will rise in absolute terms, and invested assets will fall in value. Labor is worth relatively more, and financial assets less. This seems to be happening.
Did you ever buy a US Savings bond? If you did, you loaned the government money in return for interest and eventually your money back. You didn’t know or had any control over how the money you invested was used. It’s the same idea with Social Security. This or next year the Trust will have to start redeeming those bonds to pay benefits.
Some people argue the trust should have invested in the stock market. Perhaps, but imagine the possible impact of bureaucrats directly controlling trillions in investments- I’ll go with guaranteed interest.
An excellent article; good job! Two comments come to mind: first, when I was in the military in the early 70’s I remember talk about how “everyone just knew” that military pensions would be eliminated sometime in the future because they cost the government too much money. Well, just like similar social security rumors today, that didn’t happen. But I can’t help but wonder if any young soldiers made career decisions that were influenced by that baseless rumor. Second, there’s a synergy between some of your items. For example, if someone believes myths 1, 2, 3, and 9, taken together I can see how these myths might work to dissuade someone from even trying to provide for their future because it just seems hopeless. So collectively the negative impact of these myths might be multiplied by someone who believes in several of them. If so, then collectively they’re even more detrimental than they might otherwise seem.
Excellent points. Every day I encounter someone who believes all the misinformation and outright lies about SS and Medicare as well.
‘’It’s scary stuff and it no doubt affects how people act and vote. What is really sad is this misinformation often originates in the political sector from all sides.