Generalizations about money and retirement linger. Some cliches have been around for decades, while others have recently joined their ranks. Let’s examine a few:
When I’m retired, I won’t really have to invest anymore. Society still sees retirement as an end instead of a beginning — a finish line for a career. For some, though, retirement constitutes the start of a new and promising phase of life that could last for decades. By not keeping one or two feet in the investment markets — notably equities markets — you could risk losing purchasing power as even moderate inflation has the potential to devalue the dollars you’ve saved. Depending on your situation, a good rule of thumb might be to keep saving, keep earning and keep investing, even in retirement.
My taxes will be lower when I retire. Not necessarily. You could earn less, and that could put you in a lower tax bracket. On the other hand, you might end up waving goodbye to some of the tax breaks you enjoyed while working, and state and local taxes will almost certainly rise with time. In addition, you could pay taxes on money withdrawn from IRAs and other qualified retirement plans, perhaps even a portion of your Social Security benefits. While your earned income might decrease, you could end up losing a comparatively larger percentage of it to taxes after you retire.
I started saving too late. I have no hope of retiring. I’ll have to work until I’m 85. If your nest egg isn’t substantial, working longer could be beneficial. Continuing to earn a salary might allow you fewer retirement years to plan for and the potential for your savings to compound longer. Don’t lose hope. Remember you can make larger, catch-up contributions to IRAs after 50. Remember, too, you have savings potential in workplace retirement plans. If you’re 50 or older this year, you can put as much as $24,500 into a 401(k) plan. Some participants in 403(b) or 457(b) plans also are allowed that privilege. You can downsize and reduce debts and expenses to effectively give you more retirement money. You can also stay invested.
Medicare will take care of me when I’m really old. Not true. Medicare could pay for up to 100 days of long-term care expenses you incur. If you need months or years of long-term care, you might have to pay for it out of pocket if you lack long-term care insurance. According to the Genworth Financial Cost of Care Survey, the average cost of a semi-private room in a nursing home is $235 a day or $85,775 a year.
I should help my kids with college costs before I retire. That’s a nice thought, but you don’t have to follow through on it. Remember, there is no retiree financial aid. Your student can work, save or borrow to pay for college with decades ahead to pay back loans. You can’t go to the bank and get a “retirement loan.” Moreover, if you outlive your money, your kids could end up taking you in and you might become a financial burden to them. Putting your financial needs above theirs might be fair and smart as you approach retirement.
I’ll live on less when I’m retired. We all have the cliche in our minds of a retired couple in their seventies or eighties living modestly, hardly eating out and asking about senior discounts. In the later phase of retirement, couples often choose to live on less, sometimes out of necessity. The initial phase of retirement could be a different story, though. For many, the first few years of retirement means traveling, new adventures and “living it up” a little — all of which could mean new retirees actually live on more out of the retirement gate.
No one really retires anymore. It might be true many baby boomers will probably keep working to some degree. Some people love to work and want to work as long as they can. What if you can’t, though? What if your employer shocks you and suddenly lets you go? What if your health won’t let you work 40 hours or even 10 hours a week? You could retire more abruptly than you expect. Consequently, even workaholics should have a solid retirement plan in place.
There’s no generic retirement experience or, for that matter, a one-size-fits-all retirement plan. Each individual, couple or family should have a strategy tailored to their situations and life and financial objectives.