FACT OR FICTION: 3 COMMON PIECES OF RETIREMENT WISDOM
Is retirement approaching quickly? If so, you’ve probably found that there’s no shortage of advice available on the topic. Google “retirement advice” and you’ll find nearly 200 million results. With that much advice available, some of it is bound to be incorrect.
How do you know which pieces of retirement advice you should listen to, and which you should ignore? Retirement planning is very specific to each individual’s unique goals and needs. Advice that works for you may not be right for someone else. Similarly, advice that is successful for others may not be appropriate for you. It’s not always easy to separate fact from fiction.
Below are three common pieces of retirement advice and wisdom. Consider each and think about how it applies to your retirement plan. It’s possible that you may be planning for your retirement under some inaccurate assumptions.
#1. You’ll spend less money in retirement.
Many Americans believe that their expenses will drop as soon as they quit working. Financial professionals and pundits often advise retirees to assume they will need only a fraction, such as 80 percent, of their pre-retirement income.
There may be some expenses that decrease when you retire. For example, your taxes may go down once you stop earning income. Expenses associated with work could decrease or disappear altogether. You may spend less money on gas since you no longer have a commute. You may need to purchase less clothing since you no longer have to meet a dress code at work.
However, other expenses might increase. After you retire, you will likely have a substantial amount of free time on your hands. You might fill that free time with activities that cost money such as traveling more or going shopping. You may dine out more or take up a new hobby.
Build a detailed budget so you can get an accurate view into your planned retirement expenses. Don’t operate under the assumption that you need only a fraction of your pre-retirement income because that may not be the case.
#2. You should be confident with your investments
A 2014 Wells Fargo/Gallup survey found that retirees, on average, allocate about 33 percent of their savings to the stock market. The study also found that 29 percent of retirees avoid the stock market altogether, even though more than half of that group says it’s unlikely they can reach their goals without stock market exposure.
It makes sense that retirees view the stock market with trepidation. If you’re approaching retirement, you may already feel anxious about the possibility of a significant investment loss.
Losing money just before retirement or in the early years of retirement can be damaging, but being too conservative can also be unwise. It’s quite possible that you or your spouse could live for decades in retirement. Over time, you’ll see your cost of living increase and you may need to pay for rising medical expenses.
To fund your lifestyle and other expenses, you will likely need to grow your assets in retirement. Often, investment vehicles offering growth also come with some level of risk. In order to grow your assets, you may have to take on some level of risk exposure.
It’s certainly reasonable to shift to a more conservative allocation. However, you may not want to eliminate all risk because that approach could also limit your opportunities for growth.
#3. Medicare will cover all your medical expenses
As of 2013, more than 43 million American retirees rely on Medicare in some form to cover their medical costs.2 There’s a strong likelihood that Medicare will be part of your medical coverage during retirement.
However, don’t assume Medicare will cover everything. Depending on which Medicare plan you choose, you may have to pay out-of-pocket for things like co-pays, prescription drugs and deductibles. If you purchase a supplemental plan, you may have to pay regular premiums.
Also, there are limitations on how much coverage Medicare can provide for long-term care. Often, Medicare will only cover a portion of costs immediately following hospitalization. For extended care, you may need to rely on personal assets or other types of insurance.
Look for ways to supplement your Medicare coverage. Consider an optional supplemental policy. You may also want to look at long-term care insurance. Also, if you can fund an HSA while you’re working, it could be a great way to save today for future healthcare expenses.
Colorado Transitions Financial Services Expert