Retirement Planning Assumptions and Myths
Whenever one plans for the future, it is often based on myths that one has heard from others that are taken as fact and/or assumptions that they have made. The only assumption that is guaranteed to come true is – none of the other assumptions is likely to be correct. Thus, the retirement plan must be flexible and updated as warranted.
The first assumption is how long will you live in retirement. Assuming you and your spouse are both age 65 when you retire the average joint life expectancy is approximately 24 years which means one of you will likely live to age 89. This is an average. For those with good genes, good health, and access to good health care providers, it is likely higher. In addition, when you consider the possible advances in medical care during the next several decades, the conservative approach is to assume living to age 100.
What will be the rate of inflation? Statista.com calculates it at 2.87% for the past 40 years, but the last 10 years it has averaged much less. What Baby Boomer does not remember the inflation of the 70s. We tend to use 3% to be conservative.
You must create a budget. What are your expenses going to be in retirement? How often will you plan on occasional expenses like a new car, major repair to the home, etc.? Next, you have to look at your fixed income sources like Social Security, pension(s), annuities, etc. Are they inflation adjusted? Most people want to maintain their lifestyle and think they need 100% of their salary. Not so. If you have a $100,000 salary, then about 7.5% is going to Social Security and Medicare taxes. Maybe you are saving another $10,000 into the 401k. That means you need to replace about $82,500 of spendable pre-tax income. How will you create an income plan to make up the difference?
How much do you need to have in savings to supplement your cash flow? According to a recent Fidelity survey, about 50% said 5 times their annual salary at retirement. In reality, a minimum of 10-12 times is recommended. If you retire with a salary of $100,000, then you need at least a million dollars. What is your risk tolerance? This will shape your asset allocation in stocks, bonds, real estate, CDs, etc., and significantly impact the expected return? Capital market assumptions over the next ten years are much lower than they have been historical with both stocks and bonds priced very near record highs. What happens if the first few years in retirement produce a negative return?
A popular myth is that healthcare, aka Medicare, is free. It is true that Part A (hospital) is free, but Part B (doctors and testing) along with Part D (drugs) are not. The cost is also based on your income and could be as much as $20,000 annually with a supplemental policy. Many people are turning to a Medicare Advantage Plan (Part C) as a result. While many of these plans come at no or little cost, you may be limited in the providers you use.
Another urban legend is that you should take Social Security as early as possible. Should you start at age 62 or wait until Full Retirement Age (FRA)? Prior to FRA your benefit is reduced for life and you are restricted in the amount of earned income you can have until you reach FRA. Should you wait until age 70 since your benefit increases by about 8% every year between FRA and age 70? Do you take your own benefit or 50% of your spouse’s? What happens when a spouse dies?
With all of these assumptions, it is almost impossible for anyone to create a retirement plan on their own with any degree of real confidence. Take advantage of a complimentary meeting with us in our Clearwater or Tampa office with one of our CFP® professionals who provide advice at a fiduciary standard of care.