The following is adapted from Keep It Simple, Make It Big.
Many Americans think they’ll have enough money in retirement, when the truth is, they won’t.
As Dallas Salisbury, president and CEO of Employee Benefit Research Institute, stated, “Almost half of workers (47 percent) who have not saved for retirement are at least somewhat confident about having enough money in retirement.”
Even if you’ve been diligently saving for retirement, there’s a chance you’re not saving enough, because the rules of the game have changed. Things that held true for your parents or grandparents, no longer apply today.
In particular, there are three common retirement misconceptions you must be aware of, or you run the risk of not saving enough.
Misconception #1: I’ll Work Until 65 and Keep Working Part-Time
Americans plan to work longer than statistics show we actually do. The average person plans to retire at 65. The average retiree, however, calls it quits at 62. That’s three fewer years of earnings and savings and three more years of withdrawals and depletions.
For many, early retirement is not a choice. Nearly one in two American workers was forced to quit working earlier than they had planned. Forty percent did so due to disability or health problems. A quarter did so due to changes at their employer. At best, a mere 35 percent left on their own terms.
The vast majority of Americans—four out of five—also say they will continue to work part-time in retirement. Reasons given include health insurance benefits, needing the money to purchase life’s essentials, wanting the money for life’s extras, or enjoying work.
The reality is that far fewer will be able to work in retirement than plan to do so. Although four in five expect to work in retirement, a mere one in three suit up and get to work.
Misconception #2: I Won’t be Retired More Than Twenty Years
In addition to retirement starting far earlier than many expect, it tends to last longer as well.
According to the 2004 ING Retirement Readiness & Middle America Survey, nearly one in two Americans expects to be retired for fewer than twenty years. Sixteen percent expect to live less than fifteen years after saying goodbye to paid employment.
In the past, this was a reasonable assumption. A baby boy born in 1935 could expect to live to 60, and a baby girl was expected to survive until 64. In contrast, a baby boy born in 2015 can expect to live until 78, and a baby girl is projected to reach 81.
With these ages, the assumption that your retirement will last fewer than twenty years still seems reasonable. However, today, if a couple both reach 65, one person can expect to live until age 93. There’s a one in four chance that one will live until 97.
Longevity is the reality we all face. On balance, this is a good thing, of course, but all silver linings have clouds. In saving for retirement, you have to be prepared for the potential of a thirty-year retirement.
Misconception #3: I Can Count on Social Security
Social Security was founded in 1935—when a baby boy could be expected to live to 60 and a baby girl to 64. Today, the Social Security system is struggling to support Americans as life expectancies increase.
The costs of Social Security are quickly outpacing the income. According to the 2018 Annual Report of the Social Security Trustees, in order for the Social Security funds to remain fully solvent over the next seventy-five years, the payroll tax rate would have to increase 2.78 percentage points, or scheduled benefits would have to be reduced by about 17 percent for all current and future beneficiaries, or about 21 percent if the reductions were applied only to those who become initially eligible for benefits in 2018.
Bottom line, if no action is taken—and there’s nothing pending—the trustees project a nearly 25 percent reduction in benefits will be required in 2034.
Are you prepared for a 25 percent cut in pay?
You need a plan if Uncle Sam uses any of the strategies available to erode the real value of your Social Security.
Planning for Retirement
Ultimately, when you plan for retirement, you must plan for the unknown.
You may want to work until 65 and plan to keep working part-time, but there’s no guarantee that happens.
You might expect to live to 80, but you very well could make it to 95.
A Social Security calculator may say you can expect X dollars in Social Security, but there could be significant reductions in the future.
If you want to ensure you’re saved enough for retirement, you need to plan for all these potential outcomes.
For more advice on saving for retirement, you can find Keep It Simple, Make It Big on Amazon.
Michael Lynch is a Certified Financial Planner with nearly twenty years of experience working with American families to craft plans that fund their dreams, educate their children, and finance their retirement. Michael has contributed to the Wall Street Journal and Investor’s Business Daily, and hosted Smart Money Radio for a decade. He’s served as an adjunct faculty member at Fairfield University and currently teaches financial planning to employees of corporations like Madison Square Garden and Yale New Haven Health Systems. Michael is a five-time Financial Planner of the Year for MetLife and a 2019 inductee to the Barnum Financial Group Hall of Fame. You can enjoy his latest articles and videos at www.michaelwlynch.com. CRN202210-272620