Financial Planning Perspectives

RETIREMENT MYTHS HAMPER RETIREMENT PLANNING

Numerous studies in recent years have ominously concluded that Americans are not well prepared for retirement. One congressional study, for example, found that half of all retirees in the late 1980s entered retirement with less than $10,000 in savings.

One reason for this stubborn gap between the dream of "golden years" and reality is that many people hold myths about retirement. Here are a few of them.

Social Security will take care of me. If you're a married couple making between $50,000 and $100,000 a year, Social Security will provide less than 20 percent of your pre-retirement income. The average monthly benefit for a couple where both spouses are receiving benefits will be $1,140 a month in 1994. How far would that go toward maintaining your current lifestyle?

Of greater concern for younger Americans is the question of the long-term future solvency of the Social Security system. Fewer and fewer workers are supporting more and more retirees. Some experts believe the system will go broke as early as the year 2027.

My company will take care of me. Which company? The average American changes jobs, and sometimes careers, seven to eight times in his or her lifetime. That makes it very difficult to receive the kind of pension you would if you worked for the same company for 30 years. Furthermore, traditional pension plans, in which the company pays monthly retirement income based on pre-retirement salary, are giving way to plans, such as 401(K)s, that depend predominately on how much you, not the company, contribute, and on the investment rate of return of those contributions.

My personal investments will take care of me. The average family saves less than five percent of its income. The rate should be ten percent, or more if you're older. Also, many families are not investing in long-term, higher-yielding growth assets such as stocks. Most people have their money tied up entirely in low-yielding investments such as certificates of deposit and money markets which historically have barely kept pace with inflation and taxes.

I'll have a short retirement. Half of all people who reach age 65 can expect to live another 18 years, or more. Forced or voluntary early retirement can mean some people will be retired nearly as long as they worked. It's going to take a lot of money to fund all those years.

I can start saving when I'm older. For every ten years you delay in starting to save for retirement, you'll need to save three times as much to build the same-sized nest egg.

My parents will pass on their estate to me. They face the same challenge you will: how to stretch their dollars over many years and do it in the face of rising medical bills. They may deplete most of their estate before it goes to you.

My retirement expenses will be lower. A rule of thumb is that retirement expenses will run 80 percent of your pre-retirement expenses. Yet many retirees lead active lives that cost money. Furthermore, you can't even count on taxes going down when you retire, and medical expenses will likely rise.

The government will take care of my medical expenses. Medicare does not cover all medical expenses. You'll likely need to supplement it with Medigap insurance. Medicare does not cover long-term care, either, which is an increasingly costly burden for many retirees.