7 Retirement Assumptions That May Be Wrong
There is no “typical” retirement.
Most people dream about retirement. However, it isn’t the typical retirement pictured in the media. We’ve met with thousands of people and believe there aren’t any universal truths about the retirement experience.
Here are some commonly held assumptions. They may or may not prove true for you, depending on your financial and lifestyle circumstances.
1. You should take Social Security as late as possible.
Generally speaking, this can be a smart move. Your monthly benefit will be 25% smaller if you claim Social Security at 62 instead of your “full” retirement age of 66. If you wait until 70 to take Social Security, your monthly benefit will be 32% larger than if you had taken it at 66.
So why would anyone apply for Social Security benefits in their early 60s? The fact is, some people really need the income. For most people, waiting longer implies a larger lifetime payout from America’s retirement trust. However, not everyone can bank on longevity or relative affluence.
2. You’ll probably live 15-20 years after you retire.
You may live much longer, especially if you are a woman. Statistics show that many centenarians live alone in their own homes. For many, it’s unlikely that their retirement expenses will become less with time.
3. You should step back from growth investing as you get older.
As many investors age, they shift portfolio assets into investment vehicles that offer less risk than stocks and stock funds. This is a well-regarded, long-established tenet of asset allocation. Does it apply for everyone? No. Some retirees may need to invest for growth well into their 60s or 70s because they haven’t saved enough for retirement. Investing is highly personal, and should take your entire financial picture into consideration.
4. The way most people invest is the way you should invest.
Again, just as there is no typical retirement, there is no typical asset allocation strategy or investment that works for everyone. Your time horizon, risk tolerance, and current retirement nest egg represent just three of the variables to consider when you evaluate whether you should or should not enter into a particular investment.
5. Going Roth is a no-brainer.
Not necessarily. If you are mulling a Roth IRA or Roth 401(k) conversion, the big question is whether the tax savings in the end will be worth the tax you will pay on the conversion today. The younger you are – roughly speaking – the greater the possibility the answer will be “yes”, because your highest-earning years are likely in the future. The conversion may not be right for you if you are at or near your peak earning potential.
6. A lump sum payout represents a good deal.
Some companies offer current and/or former workers a choice of receiving pension plan assets in a lump sum payout instead of periodic payments. They aren’t doing this out of generosity; they are doing it because actuaries have advised them to lessen their retirement obligations to loyal employees.
For many pension plan participants, electing not to take the lump sum and sticking with the lifelong periodic payments may make more sense in the long run. The question is, can the retiree invest the lump sum in such a way that might produce more money over the long term, or not? The lump sum payout offers liquidity and flexibility that the periodic payments don’t, but there are few things as economically reassuring as predictable, recurring retirement income. Longevity is another factor in this decision.
7. Living it up in your 60s won’t hurt you in your 80s.
Some people withdraw much more than they should from their savings in the early years of retirement. After a few years, their portfolio isn’t returning enough to replenish their retirement nest egg, and so the fear of outliving their money grows.This is a good argument for living beneath your means while still carefully planning and budgeting some “epic adventures” along the way.
Your life circumstances and your unique financial objectives dictate how you create your retirement plan. You should review and revise your plan periodically. There’s no such thing as generic retirement planning, because none of us will have a generic retirement!
At Hammond Iles, we’re all about getting you to your goals…because that’s what matters most. Our process helps you take control of your finances with objective advice, education and a powerful, disciplined and diversified approach to investing. To get your financial MRI and see how you’re doing, contact (800) 416-1655 or firstname.lastname@example.org.