Misconceptions can derail your retirement plans.
KEY TAKEAWAYS
Paying off your mortgage isn't a must.
Your spending may not be much different in retirement.
Don't assume that you'll be paying less in taxes.
There's a strategy for collecting your social security benefits.
Being too conservative can cost you long-term security.
According to the Employee Benefit Research Institute, only 46% of workers say they or their spouse have thought about and tried to calculate how much they will need saved to live comfortably in retirement.
Life doesn’t slow down to make time for retirement planning, so most people are focused on navigating "right now." When you do take the time to think about your future, there is a massive amount of incomplete or incorrect information readily available at your fingertips.
Let's debunk some common myths that impact how you approach your retirement plan.
Myth #1: You can't have a mortgage
Although retirement in a mortgage-free home is ideal, you can retire while carrying a mortgage.
It all comes down to cash flow – your income minus your expenses. If your annual income sources, such as social security, pension, and conservative portfolio distributions, allow you to meet your spending needs that include your mortgage, then you can support a mortgage.
Making bigger payments in anticipation of retirement? With the unknowns of taxes and medical expenses, that extra cash can provide meaningful flexibility to your retirement plan.
Not planning to downsize? That extra cash put towards your mortgage will be tied up in your home for the rest of your life instead of being used for other planning opportunities.
Myth #2: You'll spend less.
Most people underestimate their current spending and envision a retirement with even less spending. The reality? While some of your current expenses may decrease or go away completely, other expenses may increase.
For example, Fidelity estimates that the average 65-year-old couple retiring in 2022 will spend $315,000 on medical expenses.
That figure does NOT include long-term care (LTC).
AARP estimates that 52% of people age 65 and over will need some form of LTC in their life. With the average assisted living and nursing homes costing $54,000 and $108,408 a year, respectively, you’ll need a retirement plan that covers the potential need for LTC.
Health expenses aside, other large, one-time expenses - home repairs and replacing a car - are often overlooked and need to be accounted for in your retirement plan.
Myth #3: You'll pay less in taxes.
The U.S. National Debt sits at $30.5 trillion and climbing.
Needless to say, there will be a need for additional tax revenue in the future. With the income tax rates set to go back to Pre-TCJA levels in 2025, there is a chance that you will be in a higher bracket when you retire.
Now, think about how much of your retirement savings are in Pre-Tax dollars – balances that have not been taxed and will be fully taxable during your retirement. Because we don’t know and can’t control what income tax rates will be in two years, let alone 20 years, how much of your money is actually yours to spend?
But, let's assume that you will be in a lower income tax rate when you withdraw your Pre-Tax funds. That lower rate will be assessed on a much larger balance relative to the initial contribution. So, you will potentially be paying more in taxes on those dollars during retirement.
To minimize the risk of unknown tax rates, start carving out different tax profiles for your savings – Pre-Tax, Roth, and Taxable, with an emphasis on Roth because these dollars grow tax-free.
Myth #4: There is a "Best" time to take Social Security.
Chances are that you’ve come across one of the many articles saying that everyone should delay their social security benefits until age 70. After all, where else can you get a guaranteed 8% return on your money?
Social security is a unique asset and requires a unique approach. While your benefit can increase at an annual rate of 8%, delaying your benefits comes at a cost if you pass away sooner than expected.
To help you determine the right strategy for you, consider the following:
Your breakeven
The time it will take to recoup your lost benefits and come out ahead.
Taxes & Medicare
A larger benefit could impact taxes and increase Medicare premiums.
Health & Longevity
When you pass away, your benefit may not pass down to anyone.
Portfolio Stress
By not collecting, how much stress are you putting on your portfolio?
Myth #5: Your portfolio should be very conservative.
While your investment strategy may need to change from time to time, the idea of owning very little to no stocks in retirement is a costly mistake. Yes, you are no longer working and cannot afford to have a very volatile portfolio, but you are also planning for a new 30-year time horizon.
When we build retirement plans, the default assumption is for men living to age 90 and women to 93. Some scoff at that idea, but people are living longer and 66% of retirees say that their personal savings and investments are a major source of income.
That means a portfolio needs to have enough growth to keep up with inflation, support annual withdrawals, and provide support for longer than one might expect. You certainly can’t do that with an all-bond portfolio. A simple way to think about it: My portfolio should support my near-term spending needs, while also participating in long-term growth opportunities.
Conclusion
There’s no one-size-fits-all approach to planning, but everyone needs to have a retirement plan. As Benjamin Franklin once said, “If you fail to plan, you are planning to fail.” Hope is not a plan, and making reactive decisions leaves you with fewer and suboptimal options.
Time is your greatest asset. The sooner you start to think about what goes into your retirement plan, the sooner you’ll gain confidence in how to get there and to see it through.
Frank Iozzo, CPWA®
President, Private Wealth Advisor