Many of us give thought to what our retirement will be, and how we’ll get there. As a part of these thoughts, there are naturally some assumptions in play.
Sometimes, we have to question these assumptions. Ultimately, shaky assumptions can result in myths about retirement.
An interesting article in SmartMoney discussed what they identified as the 5 Biggest Retirement Myths. I’ll give you their 5, along with my comments:
- $1 million will be enough. I have to agree with this one being a myth. I do so regrettably, because I don’t have that much saved. It’s a number that seems to be a symbolic figure for many people as having “made it” financially, and it’s still a fantastic amount of money. Don’t we all want to get there? Thing is, what will one million dollars mean in the future? If retirement is 25 years away for you, that $1 million will likely be worth far less in future purchasing power than it is today. It may have been a benchmark for what makes a person successful in saving in prior years, but not necessarily these days.
- You’ll Spend Less When Older. Again, I agree that this is a myth. Now, it might not be if you pay off a big mortgage, get rid of debt, or get done with expenses for your kids. However, your own health care costs may rise significantly. These expenses can often be much higher than people expect. Plus, other expenses just don’t go away, and newer ones seem to emerge. Thinking that you’ll spend 50% as much during retirement, or that you’ll enjoy learning to live more frugally, is probably not as easy as it might seem.
- Older People Need More Bonds. This is an interesting one. I can of course see the logic for taking on less risk as you get closer to retirement. This is a foundational concept of personal finance and retirement planning. Is the old advice of increasing bond exposure and decreasing stock investments not applicable due to current conditions, or is it still viable? Or, should the more conservative element of one’s portfolio be invested elsewhere?
- Your Money Lasts Longer if You Move. This might not necessarily a myth, though it’s probably hard for most to truly cut expenses when moving. I suspect many people “downsize” and try to get more for their money – or use the money for their other expenses. Is that really getting your money to last longer? Plus, when moving, there are transaction costs with a home sale and purchase. Beyond that, it costs money to move and even to purchase new items for a new home, travel, etc. If people are disciplined and truly move to a much lower cost of living location and don’t take on extra expenses, I can see how money can last longer but again – it’s about discipline. Bottom line is I tend to agree with this myth.
- Uncle Sam Has Your Back. I’m as patriotic as the next American, but this is one I can agree is a myth. The reality is this: the person who has your back is YOU. Live within your means, grow the income minus expense gap, invest properly, make good decisions every day, and keep your eyes on long-term goals. If you can get some good luck as well, that helps too. But take responsibility for yourself. I think this myth is the one to be most watchful for, regarding anyone being there to support you other than your current self supporting your older self.
My Questions for You:
What do you think of this list?
Do you agree with my statements in Myth #5, about this mentality being potentially the most dangerous?
Any other retirement myths out there that you can think of?
This is one of the main reasons that I am so passionate about waking people up! Expecially number 5. I am in no way whatsoever relying on social security to pay me when I retire. Right now I’m planning as if I have to rely on myself. I’ve calculated that if I save at least 622 dollars a month at a rate of 11% (after taxes and inflation) I can retire with a 40,000 a year cash flow in just 27 years. So now I just have to work on making those returns.
FSYA – That’s great that you’re taking matters into your own hands! Smart thinking. Now, if you can get 11% after taxes and inflation, that would be truly remarkable. Don’t count on that:) Maybe 11% before taxes and inflation is in the ballpark.
I disagree with #4 – moving. If you live in a state with high tax, why not move to a location with less tax? Or move to a country with lower living cost. This can save a lot of money if you are not tied down to a location. Many retiree are moving to a cheaper country where the dollar goes further. I don’t see why this is wrong.
Retirebyforty – True, except that there are often hidden costs with moving. Such as – well – moving costs! Plus, often times people end up traveling back “home” to visit friends and family, which can add to the costs. I think that’s one of the key points here. Otherwise, sure – moving can save big money in some cases.
Similarly to #5, it’s also dangerous to assume that your kids/parents/siblings, etc will take care of you indefinitely.
I personally do think older people need more bonds though. I get scared for anyone who’s retired that is counting on the stock market to make up the gap in their lifetime savings. By the time you retire, it’s a little late to be playing catch up, especially with something that doesn’t have a guaranteed rate of return. Working part time is one thing, but rolling the dice and hoping for the best is risky as hell.
First Gen – I agree with you on your comment on others taking care of us indefinitely. I do so regrettably, because it would be great to have 100% assurance that family will be there for you in every way. However, you never know what can happen. Try to plan on self-reliance and treat help as a blessing if it comes when truly needed.
I agree with every one of them! The million may be enough if you have a other income though. I expect to spend more during retirement because I will have more free time. Regarding bonds, it depends on your personal situation. Moving for me is not a choice, since I want to be near my children and future grandchildren.
Krantcents – your comment on wanting to be near kids and future grandkids is right in line with why moving can be quite expensive: the trips back “home”!
#5 is the most powerful point. Only *you* are responsible for *you*. And Uncle Sam is going to be broker than a three-legged dog by the time I’m ready to retire.
#1 about spending less is a tricky one. As we get accustomed to a certain lifestyle, it becomes harder and harder to radically downshift.
101Centavos – Funny line on Uncle Sam:) Yes, we truly are responsible for ourselves! As for lifestyle changes – yes, that’s a great point about being accustomed to certain things and ways.
Great points! The ‘bond’ point is just a guideline. Bonds carry risk too! But comparatively, they carry a lower risk than stocks.
As a rule of thumb, it is a good one to follow.
Of course, bonds could mean different kinds of bonds and finding the right mix is an exercise by itself!
Moneycone – yes, bonds aren’t just a catch-all category as you allude to. It’s important to distinguish between different bonds to choose the right mix to fit each of our individual investing needs.
I agree with #1 too. Years ago, 1 million was enough but not now with inflation and such. It would only be enough if you had other income sources in place.
Miss T – It sure is interesting how $1 million isn’t enough but still seems like a LOT of money for many of us.
I agree with the list except for #2. I think a lot of people will have met the points you mention about paying off their mortgage and debt and have much less in expenses at that age. Plus, everyone always forgets that you no longer have to keep saving for retirement!That’s a big chunk of monthly expense wiped out :). But I agree that healthcare will likely rise and take a bite out of savings.
One other thing many people don’t account for is a slight bump when our parents pass way (God forbid) and pass down their homes and other assets. While this may not be too much for some folks, it’s still a bump worth factoring in, although most people don’t like to discuss it (understandably).
CNC – You know, people like us will probably have less debt and expense at that age, but a lot of others won’t. You do make a great point about not having to save for retirement! So obvious that many of us don’t really think of that 🙂 Good point on parents. We all pass away someday, and I agree that it’s not something we want to talk about but your point is well taken. Good comments.
These are some very valid points made in terms of retirement plans. Although I agree for the most part that these days, $1 million may not be enough for most individuals, but I am a little hesitant to quickly say it is a myth as well. Undoubtedly so that this amount of money will not have the purchasing power in 25 years that it does today, but everything is relative. For the individual that has no expenses by way of raising children, or obligations to pay off mortgages and other debts, the amount of $1 million can be a comfortable amount for someone going into these later years. I’m not saying that is suffices for everything or that when used above, it was implied as insufficient for all instances, but to say it is inadequate sounds to me like a quick assessment and one that should be mulled over for each individuals circumstances before taken in as a set guideline to go by.