Statistics show that people are rarely prepared for retirement. According to the U.S. Department of Education, only 5% of people can live off of their investments after the age of 65. The other 95% must continue to work or depend on welfare, social security, relatives, etc.
This shows that while the retirement years are supposed to be considered “golden” – a time for leisure and relaxation – they are not likely to be so unless you have planned well.
So, to help you maintain realistic assumptions throughout the planning process, here are 7 myths of retirement that you need to be careful about:
- 1. Plan For 10 to 15 Retirement Years – While the average life span is around 80 years, this calculation includes the entire population. If you consider the average for those who have already reached the age of 65, the life expectancy for this group is much higher. So, planning for 25 years of retirement is much safer and more realistic.
- 2. Stay With One Company To Retire With The Best Benefits – If you stay with one company for the purpose of getting greater benefits upon retirement, you must consider the opportunity cost of foregoing a higher salary. Often, an increase in salary of 5 to 10% may be worth the change. However, if you change jobs too often, vesting requirements may become an issue. So, all factors must be considered.
- 3. Preserve Capital – Preserve buying power, not capital! If you had a nest egg of $500,000 and earned 8%, that would provide you with $40,000 per year. However, with an inflation rate of 4.5%, the buying power of that income would be reduced to $27,000 in just ten years.
- 4. Retirees Are Taxed Less – Retirees may be in a lower bracket if they’re income goes down. However, it’s the effective tax rate that counts. So, don’t assume that a lower bracket means less will go for taxes.
- 5. Housing Costs Are Less – Even if you pay off your mortgage, property taxes and maintenance costs are continuously rising. And according averages from the Bureau of Labor Statistics, those who are 65 and older spend a greater percentage of income on housing (31%) than those who are between the ages of 45 and 64 (27%). So as long as taxes and maintenance costs continue to rise, it’s better to plan for higher housing costs.
- 6. Just The Spouse And Me – The number of adults between the ages of 25 and 29 that live with their parents has been significantly increasing over the last several years. Not to mention, retirees often become responsible for very old parents. With that said, you may find yourself supporting generations that both precede and succeed you.
- 7. Company Insurance And Medicare Will Cover Medical Bills – With the rising costs of insurance premiums, it’s not likely that companies will continue to offer the same coverage that current retirees are receiving. Also remember that Medicare pays on average less than half of all medical bills.
With all of the uncertainty, it’s critical to start planning and saving for retirement as soon as possible. One of the best tools for small business owners to do this – while saving a significant amount on taxes – is a SIMPLE IRA. As for individuals, there plenty options as well. If you’d like to discuss them, feel free to contact Larry Marietta, CPA at 317-216-1040.