The mere thought of retirement can be overwhelming, if not frightening. The transition to retirement comes with lots of complex and unique risks that warrant consideration. Too often these risks come misconceptions about planning, preparation and timing.
Here are some thoughts to debunk hopefully some of the misconceptions. The Retirement Income Reference Book, LIMRA Secure Retirement, fourth edition highlights some of the myths about retirement. Please use the following comments to help yourself dispel these myths and better prepare yourself, at least according to LIMRA. Here are the most common:
Dying before age 90. 25 percent of 65-year-old men with average health will live to age 93, and a quarter of women in that category will live to 96. The report noted that underestimating longevity risk could pose a significant threat to retirees who use systematic withdrawals, as there is a possibility of running out of money in retirement.
Keep working and never retire. Retirement is not always a choice. Studies show that over half of retirees retired earlier than they planned. About 20 percent retire because of health problems, which are seldom predictable. Additionally, 70 percent of workers expect to work in retirement or transition slowly, but just 16 percent of retirees reported they actually did continue to work.
Medicare will take care of health-care costs in retirement. Medicare typically pays a little more than half of a retiree’s medical bills. Average out-of-pocket expenses in retirement are around $5,400. This points to the importance of planning for the costs of Medicare supplemental and prescription plans and long-term care insurance coverage.
A conservative portfolio is appropriate for me in retirement. For retirees facing 30-plus years of retirement, a no-risk portfolio of bonds and CDs is very risky, making it difficult to sustain income and fend off inflation. In fact, this is not even a correct way to think about essential income. Though some advice promotes a substantial portion in equities, the real question is how to pre-fund and insulate your essential income needs.
Claiming Social Security benefits at age 62 is the best choice. Starting Social Security early may or may not be the best choice when examined with life expectancy. Which choice will provide the most income over life expectancy? Honestly, the specific facts and circumstances of each person affect the choice. There is not one answer for all.
Will I remain healthy enough in retirement to make financial decisions myself? Everyone wants to maintain good physical and mental health in retirement but retirees should plan for rising health-care costs and consider who could act in their best interest if they are not able to make financial decisions. The evidence shows that five percent of Medicare beneficiaries, age over 65 have four or more chronic illnesses.
My taxes will be low in retirement.
Do you really plan on a lifestyle that costs less? Maintaining as much income as their working years required does not lead to the conclusion that the tax burden will be less, particularly if the money comes from retirement plans that produce income at ordinary income rates.
Withdrawing 4 percent of my assets is safe and I won’t run out of money. Retirement outcomes are unpredictable for most. Periods of low market returns and high inflation, if experienced in early years of retirement, can be devastating. Also, too often people are overly optimistic about the size of a safety margin.
These are only some of the issues. Give your finances some serious thought. If in doubt, seek professional counsel.