Jun 27, 2023

Episode: 06-27-2023 | Debunking Retirement Myths

Hosted by Kevin J. Zywna, CFP® Dollars & Common Sense · Debunking Retirement Myths What Is The Purpose Of Financial Planning? We are going to talk about some common retirement myths or misconceptions about retirement. What they are and how they are generally incorrect. And then what you can do about them. Give you the […]

Hosted by Kevin J. Zywna, CFP®

What Is The Purpose Of Financial Planning?

We are going to talk about some common retirement myths or misconceptions about retirement. What they are and how they are generally incorrect. And then what you can do about them. Give you the real deal on some of these misconceptions about retirement planning so you can make your own plans when it comes to your own retirement. One of the big things we do at Wealthway Financial Advisors is help people prepare for retirement, shepherd them through the transition period into retirement, and then stay with them for the rest of their lives to ensure that their money last their lifetime and they get maximum enjoyment out of it. A core competency of ours is helping people prepare and enjoy their retirement. So here are a couple misconceptions about retirement that we hear along the way that I think are kind of common to a lot of people. And so we’ll talk about those.

Retirement Myth #1: You Don’t Need To Plan Retirement For Longevity

One of the first ones I want to talk about is the idea that many people don’t think they’re going to live into their 90s. I would say that as a general policy at Wealthway Financial, we make sure when we’re doing our planning, we plan for people to have money well into their 90s. And usually one of the first things we hear when we deliver our first draft is, “Oh, I’m never going to live that long.” People in their 60s think that’s a long time away. But I assure you that when our clients get to 88, and 89, they do hope that they live into their 90s. In fact, we just had one of our oldest clients pass away this year at the age of 102.

With the advances of medicine, it is becoming more and more common that life expectancy increases, and people do make it to their 90s. Which means you should be planning to have your money last that long. In fact, some statistics on this, if you are 65 years old, today, then you have a 25% chance of making it to age 93 if you are a man, and 96, if you are a woman. 25% chance you’re going to make into your 90s, there’s a 50% chance that one of you will make it to age 85. So planning for longevity is one of the things we do regularly. And it’s one of the first things that we typically hear people sort of brush off as, “I’m never going to live that long.” But that’s not the case, life expectancies are getting longer. This affects pension claiming decisions and Social Security claiming decisions. Because both pensions and Social Security are based on your life expectancy, the longer you live, the more your pension is going to pay out, the longer Social Security is going to pay out. As long as you’re drawing a breath, you’re drawing a check, we like to say. When you decide to claim Social Security, or how you decide to claim your pension, whether it’s Survivor Benefit, or with a maybe a certain length of time, or what age you decide to draw the pension, all those are really, really big financial planning decisions that are linked to life expectancy. So just be aware that life expectancy is getting longer. And if you’re in your 60s today, then there’s a decent chance you’re going to make it to your 90s. So something to be aware of.

Retirement Myth #2: You Will Never Retire

There’s another misconception or myth we sometimes hear from clients. When we talk about the idea of retirement, a lot of times we’ll hear it, “well, I’m never going to really retire, I’m going to work until I drop at my desk, I’m going to die with my boots on they’ll have to drag me out of here. I’m not going to retire I got nothing to retire to. I’m happy working in my job and that’s my plan.” Well, that’s okay. And there are good benefits to remaining employed well past traditional retirement ages, especially when it comes to part time work.

But retirement isn’t always your choice, we have found. In fact, about 20% of people are forced to retire because of health problems. And then there are also other complicated factors like well, layoffs, replacements, downsizing, being replaced by somebody younger and cheaper in your job. Companies require mandatory retirement at certain ages. So sometimes you don’t get the option to work as long as you live. And so that’s something you have to keep in the back of your mind.

Semi-Retirement Trend: Part-Time Transition

I will say that some of the happiest and healthiest retirements we’re seeing today are people who are consciously choosing to remain engaged in the workforce, but reduce their level of participation. So it can be a real win-win for employer and employee. If you can work out an arrangement with your employer to maybe go to part time status at, say, age 65 so you don’t retire completely. You remain engaged in the workforce, you have a reason to get up in the morning, you’re valuable, you’re appreciated, you have a lot of experience, you have a lot of knowledge to your employer that you can pass along to other coworkers and so forth. But instead of five day work weeks, maybe you work only two or three, you go to part time status.

A lot of times, benefits get reduced or eliminated. Obviously, you’re going part time, you’re going to be compensated less. So to an employer, you cost less, but you have a wealth of knowledge and experience that’s still valuable. And to you, the employee, if you’ve done your financial planning properly, have ample assets to supplement your income. So the reduction in income is not a financial burden. Perhaps the elimination of the benefits is also not a problem because you’ve filled those gaps in other ways. And so you remain a vital, engaged part of the workforce, you’ve got a reason to get up in the morning. But you don’t have that incessant grinding stress that can happen from a job five days a week. And when everyone knows you’re part time, often the problems fall off your back and go on to somebody else’s. We know from past experience that employees who are clients of ours, who have this type of arrangement, just knowing that they can, they are in a part time status and can walk away anytime they want, because they’re financially secure. That allows them to put up with some of the other inconveniences of the job. So while some people’s plan is to never retire and work for the rest of their lives, oftentimes, that decision is not always in your control. But if you can get a sort of semi-retirement for a few years, after traditional retirement age, we find that to be a very healthy win-win for a lot of our clients.

Retirement Myth #3: Medicare Will Take Care Of All Health Costs In Retirement

Tonight we’re talking about some retirement myths or misconceptions that a lot of people tend to have tried to clear those up for you tonight. Put a professional perspective on some of these thoughts and ideas. Another one that we have here is Medicare will take care of health care costs in retirement. A lot of people think Medicare, by itself, will take care of all medical expenses as well as long term care. That is not true. Medicare does a pretty darn good job of taking care of the basic medical expenses, the hospitalization and some of the doctor visits. But you need a Medicare Supplement, typically with Medicare itself. Medicare Supplements can be purchased in the private marketplace. There’s a whole alphabet soup of different types of Medicare Supplements. We’re not going to get into those today. But I just want to let everybody know that it’s usually a two part-er with Medicare, the basic government insurance plan plus the Medicare Supplements.

So Medicare does appear, although we can report that when you have Medicare with a good solid supplement that fits your healthcare needs, and everyone’s healthcare needs are different. Some people are heavy on procedures and doctor visits, and light on medications. Other people, just the opposite, rarely ever go to see a doctor, haven’t had any major medical procedures, but do take two or three, maybe medications to help keep things under control. So depending on how you consume healthcare, has a lot to do with what type of Medicare supplement is best for you. So it’s important to shop around there. We do recommend that you work with a good insurance broker there to help get the right type of insurance for you. Just a little factoid to fall away. About the average, out of pocket expenses in retirement for health care expenses, is about $3,500 a year. Now that does include insurance premiums. So Medicare Supplements, any other maybe medicine, medical type of reimbursement plans that you have $5,500 is about the amount with doctor visits and insurance premiums that people pay. So something to be aware of there.

Retirement Myth #4: Medicare Will Cover Long-Term Care

One of the things that Medicare does not cover though is long term care. A lot of people think that it does. No, only in very, very, limited circumstances. Like typically after a qualifying hospitalization. Medicare usually will pay for a limited amount of long term recovery type of care after qualifying hospitalization. So it does not pay for long term care, the traditional form of long term care, like we think about the last big expense that we all may face in life.

Retirement Myth #5: It’s Best To Claim Social Security Benefits At Age 62

All right, here’s another one I got for you. It’s best if I claim Social Security benefits at age 62. Well, I don’t know if it’s best. But it’s certainly the overwhelming choice for most Americans to claim Social Security at age 62. In fact, about 35% of Social Security beneficiaries take it at age 62, the earliest age, it’s available. The earliest age the retirement benefit is available is 62. So that tells me that once people have an opportunity to take from the system that they paid into a lot of them jump at that chance.  However, you need to be aware that by taking Social Security early, before your full retirement age, means a permanently reduced security benefit. In fact, claiming at 62 can mean that your benefit is about 25 to 30% less than it otherwise would be at your full retirement age. And nowadays, for most people, their full retirement age is either sometime in their 66th year of life, or we’re closely approaching 67, for a lot of us. So it does migrate up. It depends on the year you were born.

But if you take Social Security benefits before full retirement age, and you take it as early as 62, they’re going to be reduced by about 25 to 30% for the rest of your life. Now you do get that, what four or five years of payments earlier. So that is somewhat of a benefit. But if you delay past your full retirement age, which again is 66 or 67, depending on when you were born, then your Social Security benefit continues to increase. And in fact, can increase between about 24 to 32%. Above your full retirement age benefit increases every month, a little bit, about 8% per year, up until age 70. So you can delay or defer Social Security benefits as late as 70. After that, there’s really no benefit you should take. Take the benefit at that point.

But if you take Social Security before the full retirement age, then you also have to be mindful of the fact that if you earn income while you’re claiming early social security benefits, if you earn too much, then Social Security benefits can be reduced. And it’s not too much that you have to earn in order to start seeing those benefits reduced. In fact, in 2023 that’s only about $22,000 worth of earned income before Social Security benefits start getting reduced. Now that reduction is temporary while you are below full retirement age and earning money that’s when it can occur. But after full retirement age, then those reductions in benefits do get put back on later. But kind of defeats the whole purpose of taking early if you’re going to work and earn income, so be mindful of that.

Retirement Myths Debunked Recap

Tonight we’re talking about retirement planning, misconceptions and some misinformation that typically is out there. Some thought processes that don’t quite line up with some of the facts that we typically see. Earlier on in the show, we talked about people who think that they aren’t going to live that long and aren’t going to live into their 90s. Statistically speaking, once you make it to age 65, you’ve got about a 25% chance you’re going to make it into your 90s, and you’ve got a 50% chance you’re going to make it to 85. So plan for longevity.

Then there’s the misconception that some people think that their retirement plan is not to retire. They’re going to work as long as they live. Well, that’s not necessarily a bad idea. If you enjoy your job and it’s not overly physically or mentally draining, then that can be a healthy way to spend the later half of your life. But also know that that decision might not always be yours, even if you work for yourself, you can essentially be fired, or laid off, or replaced. Sometimes health problems get in the way. In fact, about 20% of the time, people do have to retire for health reasons.

Then we talked about Medicare. How much Medicare takes care of from a health insurance standpoint. Expect about $5,500 a year of additional medical expenses in retirement. Medicare doesn’t cover everything. You need to supplement, to help you out with that if you want that type of protection.

Then the last thing we talked about the first half of the show was Social Security claiming at age 62. Overwhelmingly most people do it. 35% of Americans choose to claim Social Security at age 62, the earliest age it’s available. And in fact, I’ve got some other figures here. Let’s see, the next highest level is age 66. 18% of people take Social Security at 66, 10% of people at 65. And there’s a smattering of people at 63-64 and above 66, which is currently full retirement age. So most people will take it at age 62 or full retirement age at 66.

Retirement Myth #6: You Must Have a Conservative Investment Portfolio in Retirement

Here’s one of my favorite misconceptions about retirement planning. And that is the idea that you have to have a conservative investment portfolio in retirement. That’s somehow going from a growth-oriented portfolio, while you’re in your working years, to suddenly flipping a switch and going ultra conservative with your investments just because you retired. That is old, outdated, antiquated thinking around portfolio design for retirees. I would say it’s very prevalent in society, thinking as well as professional thinking, that you have to get overly conservative once you retire on the idea that you don’t have time to recover from the temporary occasional market pullbacks. Well, that’s not necessarily true. As you said at the outset, there’s a good statistical probability that especially if you are part of a couple, each individual in a couple, on average lives longer than people who live alone. But there’s a good statistical probability that you make it into your 90s if you retire in your 60s, and you live into your 90s.

Well, that’s a whole other third of your life that you have in front of you in retirement, 30 years. That’s a long time horizon. When you have a long time horizon, you can afford to be more growth oriented in your investment portfolio. In fact, you should be more growth oriented because one of the main objectives of portfolio construction is to ensure that your money outpaces the corrosive effects of inflation. And the best way you can accomplish that objective is by having an investment portfolio made up primarily of equities or stocks. Bonds, especially in the current interest rates, are not going to be the tool that will allow your portfolio to grow consistently above rates of inflation. You need the equities. And so we still see thinking today, the traditional retirement portfolio in the industry used to be what’s known as the 60-40, portfolio 60% stocks 40% bonds. But bonds will do nothing but drag down your long run portfolio performance. They usually do act as a little bit of a ballast or a buoy to stocks when stocks go through an occasional temporary decline. Usually bonds go in the opposite direction, but overwhelmingly 75% of the time in any given one year hold period, stocks go up 75%. On any given one year hold period stocks are up. That’s a pretty high probability. So to protect against the 25%, one year declines if you have 40% of your portfolio in bonds, bonds, long run rate of return is down around three or 4%.

After inflation stocks are like 7 or 8% after inflation. So all you’re doing is dragging down the long run performance of your portfolio by being too bond heavy. In our practice, we have radically reduced or eliminated bond holdings for most of our client portfolios regardless of age, because that’s where you’re going to get the greatest growth. The risk that people perceive in stocks or in equities is very low when you have a long time horizon, greater than 10 years. In fact, if you have at least a 10 year hold period, then there’s a 97% chance that you will have more money 10 years into the future than if you invested it today. 97% chance with a 10 year hold period. Well, those are pretty darn good odds. So yes, I know within that 10 year period, there can be bouts of volatility that can be frightening, and concerning, if you don’t know what you’re doing. But that’s part of the price that we all have to pay for the long run rates of return. There are 7, 8, 9, sometimes 10%, on average, each year. So big misconception is, too many people get far too conservative with their investment strategy as they come into retirement thinking that their time is short. And as we’ve already demonstrated, chances are it’s not that short. You have another third of your life ahead of you. So don’t get too conservative with those investments.

Retirement Myth #7: You Don’t Need to Estate Plan or Set Medical Power of Attorneys

A lot of people don’t think about this when they think about their health as they go into retirement, but they don’t think about what can happen if they can’t make their own decisions. And so, as we age, things become more difficult. Sometimes we don’t have the mental or physical capacity to fully make all of our own health care decisions. So it’s very important from an estate planning perspective, as well as a lifestyle perspective, to have a couple instruments that can help improve your physical quality of life. That is a medical power of attorney and a Medical Directive for healthcare. Now, a medical power of attorney is somebody who can make decisions on your behalf if you are incapacitated, or in an accident and you’re in a coma or knocked out or you can’t make your own decisions. Your medical power of attorney can, within reason. Make sure that if you have a medical power of attorney that you talk about it with your primary care physician. Because if you end up in the emergency room, and your medical power of attorney person doesn’t show up with the papers, there’s going to be no one in the emergency room that is going to talk to that power of attorney. So it’s important to have one, file it, give copies to your medical power of attorney person and then also your medical professionals, key medical professionals, mainly your primary care physician.

 And then the Medical Directive for health care is in the event that you do become seriously incapacitated, it can express your wishes on how you would like to be treated in the event that you are incapacitated, are unresponsive, are unable to communicate effectively for an extended period of time. The most common situation is if you were in a coma for say six months. Would you want to remain in a coma for six months, one year, two years? How long would you want to be in that state? And the reason this document is important is, while I’m not going to know what that’s like, I’m not really concerned about that.

Know what that does. It takes the pressure off the rest of your family. Because the rest of the family will be left trying to make the decision for you and trying to figure out what your wishes would be in the absence of this formal document. And we know from professional experience that it is anguishing to the family trying to figure out what mom would have wanted or dad would have wanted to be in this condition. And sometimes the siblings can have different perspectives and different opinions. And that can lead to infighting at a time of great need and crisis in the family. So not having your wishes in the form of a Medical Directive can cause a lot of family strife to your other relatives and your family if you don’t put them down in writing. So you’re doing them a favor by putting your wishes in writing.

Retirement Myth #8: Taxes Will Automatically Be Reduced In Retirement

Tonight we’re talking about retirement planning misconceptions. And some of the things that have kind of worked their way into the common vernacular about retirement planning. A couple more to finish up the show with. A lot of times people think that once they retire, their taxes are going to be low. Well, they may go down, that much can be true. Because for most people, their income goes down. Right? You’ve retired. You’re not earning any income. You have maybe just Social Security, maybe just a small pension, and then you’re living off your investments to help fill the gap. So I would say for most Americans, that is kind of true. Their taxes decline, and they can drop down into the 12% or 22% tax bracket.

But if you’ve done your financial planning properly over your lifetime, then typically that is not the case. If anything, sometimes your taxes go up. But that’s because your income has gone up as well. So for people who have done a great job of saving over the course of their lifetime, this retirement phase that that they’re going into becomes one of the happiest, most fulfilling, most rewarding times of their lives because now is the time, in early retirement, to enjoy the fruits of your labor. That means earned income may have declined because you’re no longer working full time. Your income has gone down, but your free time has gone up. And with a lot of free time comes travel, entertainment, and a lot of extra purchasing. We see, you know, Amazon is open 24 hours a day, seven days a week. So it’s easy to get caught up in some boredom buying, we like to call it when you got nothing else to do, then maybe go on Amazon, check, check it out.

So a lot of times, if you’ve done your financial planning properly, you built up a solid nest egg. This is the time to enjoy it. And that means those withdrawals from the 401K plans or the TSP or the 457, all that money is flowing back to you now after a lifetime of sacrifice and savings, and you should enjoy it. But it does all come out as ordinary income. And if you are taking out as much as you are earning prior to your retirement, then no, you will not see a reduction in your tax bill. So very dependent there on whether your taxes go down in retirement.

Also, it’s very difficult from a planning perspective. You know, if you’re not yet retired, say you’re in your 50s. It’s very difficult for us as planners to figure out what tax rates are going to be 10 years into the future when you do officially retire because that’s at the whim of Congress. And I’m sure I don’t have to explain to anyone on this day, listen to this station, you know how difficult that can be to predict and how difficult it is for Congress to even come up with decisions as it relates to tax code.

Retirement Myth #9: You Can Always Withdraw 4-5% from Your Portfolio During Retirement

Okay, last thing I want to talk about as it relates to retirement planning misconceptions. And this is a little bit of technical inside baseball. Not everyone is aware of this. But there’s a kind of rule of thumb that you can use to determine how much of a properly managed, growth-oriented, well-diversified, investment portfolio, you can withdraw from each year, and have a high degree of confidence that it will last to your retirement. That’s about four or 5%. This is not a rule. It’s not a hard and fast number. It’s a get you in a ballpark. Four or 5% is what you can withdraw from your portfolio every year and increase that dollar amount for inflation. So that your purchasing power stays the same. Yes, that works. But it depends on the first few years. Big, big pivotal point is the first few years of market performance after your retirement depends on whether that can hold true.

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