While current retirees have been able to largely rely on a safety net of Social Security, pensions and, in some cases, retiree health insurance, younger workers will have to take a much more proactive approach in planning their retirement income, according to Rebekah Barsch, vice president of market strategy at Northwestern Mutual Life Insurance Co.
“It’s up to each of us now to create our own paycheck in retirement by participating in defined contribution plans like 401(k)s, contributing to IRAs, protecting the assets we’ve saved, and perhaps most importantly managing that income once we enter retirement,” she said.
With this reality in mind, Barsch outlined five significant retirement planning myths in a recent webinar that offered insight on ways to generate a reliable income stream throughout retirement, regardless of how long an individual lives.
Perhaps the biggest myth, and the one that worries Barsch the most, is the fact that most people underestimate their life expectancy, which can lead to serious financial troubles.
“The problem is that if someone has a retirement income plan that is designed to last 20 years and they live for 30 or 40 (years) that can have devastating consequences,” Barsch said.
The greatest concern lies in the gap between an individual’s guess at how long they’ll live and the retirement income plan they’re following.
“It works fine if you die on time,” Barsch said. “Otherwise, it doesn’t work out so well.”
More than 50,000 centenarians live in the United States today. Eighty percent of those centenarians are women, according to statistics Barsch cited.
Another common misconception rests on the idea that, “I’ll only need 80 percent of my current income once I’m in retirement,” Barsch said.
While many major expenses, such as mortgages and car payments, are often taken care of by retirement age and retirees no longer need to divert funds to their 401(k) plan, other lifestyle expenses including health insurance, traveling and recreation, and support of family members can end up costing more than anticipated. Retirees’ tax brackets also may increase.
To prepare for these expenses, Barsch recommends two steps.
“We all need to visualize in some detail what our retirement’s going to look like,” she said.
Individuals should assess factors like their living situation, hobbies, family’s needs and their desire and ability to leave a legacy. They can then create a practical retirement budget that outlines essential expenses, discretionary expenses, guaranteed income and investment income.
Barsch’s third retirement planning myth targets health care, as many pre-retirees believe their health care costs will be nominal in retirement, thanks to Medicare.
However, Medicare does not cover all of a retiree’s health care expenses, such as vision, dental and hearing expenses, co-pays or long-term care expenses.
“This all adds up fast,” Barsch said.
To gauge potential health care costs, Barsch points to www.medicare.gov, a resource that allows individuals to calculate anticipated health care costs in retirement based on health and location.
In identifying retirement planning myths, Barsch also addresses individuals’ false sense of security in withdrawing 4 percent each year from their retirement savings.
The 4 percent rule leads to uncertainty as generations are living longer, the success of the rule depends on the timing and sequence of market returns, and it doesn’t consider the impact of taxes.
To accommodate finances, many pre-retirees assume they’ll work longer if they need more income.
“When you’re in your 50s and planning for retirement, the idea of working into your 70s seems completely doable.” Barsch said. “But when you get closer to retirement age, plans change.”
While two-thirds of pre-retirees say they’ll work part-time throughout their retirement years, only one-third of current retirees actually continue to work.
To adequately prepare for retirement, no matter how long it lasts, individuals need to take every opportunity they can to save in order to minimize the impact of early retirement, Barsch said.
Working with a financial advisor can be particularly useful to stress test retirement income plans against different financial scenarios and changes in the market, evaluate when to take Social Security and solidify a comprehensive retirement income plan in writing so that the assets and risks of retirement are evident, Barsch said.
“Retirement is an exciting and fulfilling period of life, and it deserves an investment in having a sound financial plan so that you can really have financial security – the peace of mind of financial security – while you’re enjoying your retirement years,” Barsch said.
