Saving for Retirement: Myth vs Reality

Research tells us that 53 percent of households are “at risk” of not maintaining their living standards in retirement. While much of that is simply because people are not saving enough, even those who think they are doing a good job planning for their future may have made some mistakes due to some big myths surrounding retirement saving.

Can you tell which of these statements is a myth and which is reality?

Myth or Reality: I can’t afford to save for retirement.

There always seems to be bills to be paid and never enough money leftover at the end of the month to save for the future. It’s no wonder that many people never get around to saving for retirement. They always seem to put it off for the future, planning to “catch up” with bigger contributions later on.

But these folks are failing to take advantage of two of our most powerful allies in saving for retirement: time, and compound interest.

Could you retire comfortably on less than $3 a day? You probably spend more than that on coffee every morning. There’s no way that anyone could retire on less than $3 a day.

The truth is, if you save $2.86 per day towards your retirement ($40 every two weeks), you could have in excess of $81,000 saved at the end of 30 years. You will have saved $30,160 of your own hard-earned money, and the power of compound interest and time will have added $50,884 on top of that. If you managed to save $5.71 a day, or $80 every two weeks, you could have over $162,000 saved.

(This hypothetical example is based on $40 and $80 contributions made every two weeks for 30 years to a tax-deferred retirement plan and a 6 percent annual rate of return compounded annually. Your own plan account may earn more or less than this example, and income taxes will be due when you withdraw from your account. Investing in this manner does not ensure a profit or guarantee against loss in declining markets. This example is for illustrative purposes only and does not represent actual or future performance for any fund.)

Myth. When time is one your side, everyone can afford to save just a little bit. It will make a big difference.

Myth or Reality: My expenses will decrease during retirement.

People think that once they stop working, their expenses will go down. It is true that you may not need to replace 100 percent of your pre-retirement income, since you won’t be commuting, you won’t be saving for retirement, etc.

But you may also find that your expenses actually increase during the first few years of retirement because you have more time to enjoy the things you weren’t able to do while you were working. All the travel you’ve been planning is likely to cost money.

Even if you keep your expenses level throughout retirement, the costs of goods and services, housing, energy, taxes, healthcare – generally, these costs continue to increase over time. You don’t tend to feel the effects of inflation as much when you’re working, since raises and salary adjustments help you keep pace.

However, when you consider that you will be retired for 20 or 30 years on a fixed income, inflation can really take a toll. Even if we hold to the low inflation rate of three percent we’ve had over the last 30 years (2.7 percent from 1986 to 2015, to be exact), the reality is that you will need additional income just to maintain the same lifestyle. With three percent inflation, the purchasing power of a $50,000 annual income is halved in 20 years. This is not even taking into account times of higher inflation, as in the 1970s, when inflation hit 11 percent.

Myth. Your expenses won’t go down much, if at all, and you must plan for inflation.

Myth or Reality: I don’t have to save as much because I have a pension.

Many people mistakenly believe that their company has a pension plan, often times confusing this with their 401(k) plan. But there is a big difference between a retirement plan funded by you – a defined contribution plan — and a pension plan funded by an employer.

Over the last twenty five years the number of pension plans has decreased significantly, from 114,000 to just 38,000 today. And pensions now make up only 19% of all household retirement income.

If you are lucky enough to work for a company that provides a pension, it will likely compose a smaller percentage of your retirement income than you might think. Most pension plans are not adjusted for inflation.

Myth. Companies are phasing out pensions, and they represent less and less of household retirement income.

Myth or Reality: Social Security may not be enough to cover my expenses.

Too many people believe that their Social Security benefits will be sufficient to cover their expenses in retirement or at least a significant portion of their expenses, especially since there is a whole generation of people before us who are getting along just fine in retirement.

In reality, Social Security only provides 37 percent of the total income for people aged 65 and older. The other 63 percent of their income is coming form other sources like pensions, 401(k)s, IRAs, annuities, permanent life insurance, savings accounts and even employment.

This is why it’s so important to understand how your Social Security benefits are calculated and what your future payouts could be. Many people also don’t realize that the age you begin taking Social Security will also impact the benefit amount you receive. Retiring earlier than your full benefit age can decrease your benefits by as much as 30 percent.

Reality. Social Security is only meant to provide a safety net.

Myth or Reality: Medicare will take care of my medical expenses.

Many people mistakenly believe that Medicare will cover their medical expenses. The reality is that Medicare only covers basic healthcare expenses, leaving significant out of pocket costs that every person needs to pay for. Because there is such a gap, a lot of people opt for a supplemental healthcare, prescription, dental and vision plans, which require monthly premium payments and co-pays.

For this reason, it’s estimated that the average healthy 65-year old couple will need up to $360,000 just to pay for healthcare costs in retirement.

And that $360,000 refers to healthcare expenses only and doesn’t include long-term care. People tend to forget about long-term care, but the reality is that 2 out of 3 people over the age of 65 will need long-term care services at some point in their lives.

Myth. Medicare provides just the basics. You will likely want to supplement it.

Myth or Reality: People are living longer than ever before.

Many people look to their parent’s situation to help guide many of their retirement decisions, often thinking that their plan should be similar. But regardless of how many years your parents lived in retirement, this is not an accurate indicator of your own life expectancy.

The reality is that people are living longer than ever, spending almost as much time retired as they did working. If you are married and live to age 65, at least one spouse has 63 percent chance of living to age 95. Longer life expectancies are normal these days — think about how many people you know who have lived well into their eighties and nineties.

Reality. Outliving your money is a real threat.

Myth or Reality: Women and men experience the same challenges in retirement.

Women tend to live longer than men in retirement. On average, women live about 5 years longer than men. According to 2010 Census data, women currently account for 3 out of every 5 people aged 65 or older. For every 100 men, there are 127 women at age 65, and, at age 85, for every 100 men there are 168 women. Women regularly outlive men in retirement.

In addition to longevity challenges, women also tend to be out of the workforce for an average of 12 years to take raise children or take care of ailing parents. Taking time off means that women are not contributing to employer sponsored retirement plans or IRAs or earning credits toward Social Security benefits. To say nothing of the wage gaps that women often face.

Myth. Women live longer, yet they often have less saved than men.

Myth or Reality: I don’t need life insurance in my retirement plan.

Many times, people don’t think they need life insurance as part of their retirement plan, especially if they are single, have grown children or have little or no mortgage.

The reality is that permanent life insurance provides both protection and possibilities which can play an important role in any sound financial plan while also helping address key retirement needs.

Often, people don’t live their life to the fullest in retirement, not spending down their annuities or IRAs in order to leave something to the children and grandchildren. Life insurance can be a more tax-effective way to leave money to your heirs while still enjoying retirement. Many people are familiar with the death benefit protection feature but don’t how it can be more tax-efficient way to leave something for the kids.

While the cash value part of their life insurance provides for many retirement possibilities like supplementing retirement income, addressing unexpected medical costs, helping you delay taking Social Security benefits or even buying a vacation home. Having a life insurance policy provides many possibilities in case you end up with unexpected issues at any point in your life, including retirement.

Please note: Accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage and can reduce the death benefit and policy values.

Myth. Life insurance can be a valuable component of many retirement plans.

Myth or Reality: I need more money than I have to work with a financial professional.

As they say about college: The goal of going to school is to become educated. Likewise, the goal of working with a financial professional is to become wealthy.

A financial professional can provide expert advice and an objective viewpoint. Working with a financial professional can take the emotions out of the equation and help you understand your options with clarity. More importantly, people with a formal retirement plan saved three times more than those without a plan.

Myth. You can work with a financial professional regardless of your financial situation.

Source: National Retirement Risk Index, Center for Retirement Research at Boston College, 2012
Source: Pension Benefit Guaranty Corporation
Source: Social Security Administration Fast Facts & Figures About Social Security, 2013
Sources: Employee Benefit Research Institute, 2010 and U.S. Department of Health and Human Services, National Health Expenditures, 2013
Source: Annuity 2000 Mortality Table
Source: Wells Fargo, Middle-Class Retirement Survey, 2013

This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your client’s situation. The information in this material is not intended as tax or legal advice. Always consult your legal or tax professionals for specific information regarding your individual situation.
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