Planning your financial future is the last place you want to use bad rules of thumb. These crazy retirement myths could end up costing you big time.
There’s so much uncertainty around planning your financial future that it’s natural people would cling to retirement myths and rules of thumb guesstimates. Between not really being able to know what rate of return you’ll get to not knowing how much you’ll really need, people build in all kinds of assumptions to help them sleep at night but end up missing their retirement planning goals.
Some of the assumptions and retirement rules are ok, like saving at least 10% of your income and maxing out 401k match plans. Other assumptions and myths could end up putting you off track. Some of these retirement myths and assumptions are so pervasive that they’re accepted as truth without any thought.
Retirement Myth #1: You’ll Need 80% of Your Pre-Retirement Income
I put some of the numbers from the Bureau of Labor Statistics Consumer Expenditure Survey in a table below to compare how people 65+ spend their money compared to everyone else. It seems there is a little truth to the 80% retirement myth. On average, people 65+ spend about 81% the amount spent by the younger group.
Look a little further out and you start to see where the 80% myth breaks down. People 75 years and older spent just 68% ($35,000) of the amount spent by the younger group. That means, while you may spend about 80% when you first retire, you’ll likely spend much less as you get older.
The things you’ll spend money on will obviously change and you own situation will differ depending on your lifestyle. You may choose to eat out more frequently or may pay less for repairs if you rent instead of own your home. You also won’t have to save for retirement or pay payroll or social security taxes.
While medical expenses will probably be higher, you can deduct unreimbursed medical and dental expenses in excess of 7.5% of your income. While social security benefits may not help much, they also enjoy some tax benefits.
If you’ve always wanted to travel, you may find yourself spending more during the first few years of retirement before spending levels off a little.
Discover Bank offers one of the best retirement calculators I’ve seen with a few different options on IRA savings and how to estimate your retirement needs.
Instead of accepting a rule of thumb for how much you’ll need in retirement, actually think about what retirement looks like to you. Do you want to travel? Will you work part-time or maybe take on side-gigs? We looked at finding your own retirement number and realistic retirement planning in an earlier post linked here.
Retirement Myth #2: Social Security will pick up the tab
When Social Security was created at the end of the 1930s, it wasn’t intended to be a benefits system. In 1940, men over the age of 65 only had a life expectancy of 77 years while women were expected to live slightly longer to 79 years old. Besides the fact that people were not expected to be collecting benefits very long, the average benefit of $22.71 per month was considered a minimum subsistence.
Somewhere along the way, people started thinking about social security as a plan for retirement savings. Average benefits of $1,200 a month are barely enough for the bare necessities. Assuming your spending is around the average in the table above, that’s just a third of what you’ll need in retirement.
Over the past 75 years, life expectancy has changed dramatically. At the age of 65, men are expected to live to 84 years and women to 86 years old. An extra seven years may not seem like much but the retirement age has only increased to 67 and the system is straining under the weight of payments. We won’t get into a debate about the future of social security benefits but the fact is that either payments will need to be cut or the retirement age increased, or both.
Retirement Myth #3: You’re Safe Withdrawing 4% of Your Portfolio
I don’t know where this one came from, maybe the fact that the average bond yield over the last few decades has been around four percent. Maybe it comes from the idea that you should be planning on at least 25 years in retirement, which would mean a 4% withdrawal is about 1/25th of your retirement savings.
The 4% retirement withdrawal rule doesn’t account for your spending plans or for the return you might be able to get on your investments.
Not to mention that an arbitrary 4% can change significantly depending on the fickle nature of the stock market. The 2007 retiree may be fine with a 4% withdrawal on a portfolio of $950,000 but that 4% may not have been sufficient in 2009 when the portfolio was worth…something less.
One of my favorite ways to invest for retirement is through a portfolio of healthcare and dividend stocks. By positioning your retirement investments in healthcare stocks, you benefit from the increase in healthcare spending and profits can help offset some of your own spending needs. I set up a Ready-Made Retirement Portfolio of stocks, bonds and other investments on Motif Investing. The online investing site lets you group up to 30 stocks in a custom fund and then buy all of them at once for one commission, saving you hundreds in fees.
Clinging to rules of thumb and crazy retirement myths will not help you plan for the future and may just be giving you a false sense of security. Instead of planning according to myths, plan your own future and what you want in retirement. With a clearer picture of your needs, you’ll be able to understand the return you need on investments and how close you are to your sandy beaches.