Retirement: Facts or Fiction

There are enough books and articles written about retirement planning one would expect to find all the advice necessary to secure a comfortable retirement. However, the advice and strategies offered may not meet your needs.

What’s more, there may be so-called facts about retirement and retirement planning that have been conventional wisdom for many years but could be worth challenging. Here are four of them:

“Fact” #1: You’ll need 60% to 80% of the income earned in your working years to live comfortably in retirement.

These figures pop up frequently and are based upon the assumption that certain job-related (and other) expenses will disappear once retirement begins.

Is it logical that you can live happily ever after on less money than you earned in your working years? Do you truly want to live on less than what you are earning currently? The answer to those questions may be no if you expect to travel, pursue expensive hobbies or provide financial assistance to your children or grandchildren. Unfortunately, illness or advanced age may mean huge medical and support bills that might not be reimbursed by insurance. (Of course, if you won’t have a mortgage, or need to pay college expenses, you may need less than 60% to 80% of your income.)

Our advice: Analyze your individual situation to determine how much you’ll need to live on in retirement.

“Fact” #2: Retirement is a time for leisure.

There’s no longer a line dividing pre- and post-retirement. In a recent survey of 1,200 baby-boomers conducted by AARP, almost eight in ten reported they expected to take a job after retiring.

For some the reason may be need, for others the desire to keep active. The relaxation of the rules for reduction of Social Security benefits when you continue both to work and to collect payments has meant more working retirees. This year, retirees at the full retirement age (age 65 and 6 months or older) may keep all of their Social Security benefits, no matter how much they earn.

Some professionals note with caution a retiree’s potential earning power. According to Notre Dame economics professor Teresa Ghilarducci, "Jobs for older workers generally don’t pay as well as those for younger workers, and the raises aren’t as good.” So, she recommends, when trying to put a number to your retirement income earnings projection, you may want to estimate on the low side.

“Fact” #3: Money coming from your tax-sheltered retirement plans is likely to be taxed at rates less than those at which you were taxed during your working years.

You make contributions to a 401(k), IRA or other retirement plan with pretax dollars. You’ll begin paying tax when you take your money out; generally at ordinary income tax rates.

Today, for most middle and upper-middle-income taxpayers, tax rates are likely to be in the 25% to 30% range, significantly lower than in decades past. Those numbers aren’t likely to drop radically after retirement, especially if you continue to work. Of course, with historically low income tax rates, it’s reasonable to assume the only direction that rates are likely to go in the coming years is up!

When trying to figure out what you will net after tax from a distribution from your retirement plan, it’s probably a good idea to assume the money will be taxed at your top tax rate.

“Fact” #4: Retirees should switch from stocks to fixed-income investments, such as CDs and bonds.

This statement is too broad a generalization to apply in all circumstances.

The stock market can be volatile. Short-term downturns may not be damaging to investors who can wait out the market but switching from stocks to bonds or cash is an oversimplified approach to reducing risk. For one thing, bonds can have bad years as well. A strategy that does not produce an investment return that exceeds inflation is a losing one.

The best approach is an individualized program, tailoring your portfolio to your tolerance for the ups and downs of the markets and adopting techniques that handle risk in an intelligent manner, reducing uncertainty as much as possible, while seeking opportunities that will help your portfolio grow.

We would be pleased to serve as your professional resource as you plan your retirement. We can offer valuable insights with regard to the management of your investments, both today, as you plan for retirement, and later as you enjoy your retirement years.

To find out more, please contact us.