Retirement is highly individual and must be tailored to personal circumstances. It may appear to be a general balancing act between reduced activity and consumption versus increased health care costs and inflation, but even these outlays are subject to differing ages, interests, and locations. Beware of oversimplified rules of thumb when your entire future is at stake. Some of the most widely accepted fallacies can set you on the wrong path with consequential impact.
Some misleading myths and mistakes
Here is a brief sampling of a few popular narratives:
Social Security will disappear. Pew Research reports that 42% of respondents aged 30-49 believe they will receive nothing by the time they retire, and 42% expect only a pittance. Only 15% of respondents aged 18-29 anticipate their payouts will match current levels. These projections are inconceivable. Today, half of retirees rely on Social Security for 50% of their income and a quarter of retirees rely on it to meet 90% of their monthly expenses. The program enjoys huge bipartisan support, and future payouts are funded by tomorrow’s workers. The political furor would be unimaginable if the government usurped monies already paid in. However, it is true the trust will be exhausted by 2035 unless adjustments are made. Otherwise, benefits would be slashed by 25%, but they still would not disappear.
You need a specific amount of assets to retire. The number is often cited as 70%-80% of your preretirement expenses. This approach is incorrect. You will need enough money to maintain your lifestyle rather than a precise sum. And a million dollars is no longer that magic figure, considering there are 48.6 million millionaires worldwide. You probably need many millions to fully disregard what things cost.
Stock market and real estate values are naturally volatile. Take a multiyear perspective. In fact, the S&P 500 gained every year from 2012 through 2022, except in 2018, when it shed 5%. From 1975 to 2019, the All-Transactions House Price Index rose as well. Nothing grows in a straight line.
You can’t afford to save. On the contrary, you can’t afford to delay saving. The median savings of 25-to-29-year-olds is just $5,500. You will need a larger nest egg than previous generations. If you delay saving, you lose the power of compounding. An inflation rate of 4% halves your purchasing power every 18 years. Even if you have postponed retirement savings, catching up on lost ground may not be too late. If you are 50 or older, you may be able to increase your maximum contribution levels for plans like 401(k)s, 403(b)s, and individual retirement accounts.
You can always work longer or work part-time in retirement. Factors beyond your control may intervene, like layoffs or your or your spouse’s health care needs.
Medicare will meet health care needs. The program does not cover deductibles, co-payments, dental, vision, hearing, nursing homes, or long-term care.
My employer will provide for me. Sadly, times have changed. Savings and pensions now have merged into defined contribution plans, defined benefit plans are vanishing, Social Security may not suffice, and maxing out a 401(k) would not replace a six-figure income.
My retirement tax bracket will be lower. Rates might rise instead, and 401(k) contributions might become fully taxable. You may qualify for fewer breaks, like mortgage or college savings deductions.
Too many uncertainties
Life does not follow a linear path. People keep launching new careers and relationships. You may believe that your 20s and 30s are your best years, but this is largely a consumer society portrayal.
For instance, you may be counting on an inheritance to bail you out. Yet you face too many contingencies, even if your parents are very wealthy or in poor health. They still might opt for a final spree or be forced to spend on their own care. And if they’re single, they might also remarry and divert your expected inheritance.
Your estate planning attorney can help you separate facts from myths so you can plan the most comfortable retirement possible.
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