Are you getting close to retirement and believe that you have everything figured out? Well, you may not. Some people spend years or even decades planning for retirement. For others, there is a date in the future on a calendar where they intend to punch out of work for the last time. People craft budgets, calculate portfolio returns and create dreams for how their time and their money will be spent. What this can easily lead to is misplaced confidence in the way things will work out. But for a number of retirees reality will turn out to be much different than their perceptions and expectations. Here are five things that you may think are true but aren’t.
It’s all in the timing
Probably the biggest disconnect is between the date that retirees expect to retire and when they actually leave their full-time jobs. Many financial plans now rely on a person working well past 65 to ensure they won’t run out of money after they retire. One fourth of all workers think they will retire at age 70 or later and another 5% think they will retire at age 65 through 69. But the reality is that some 70% of retirees will stop working before they turn 65. Why is this? It’s due to health problems. You may think that it’s a kind of magic bullet to work to age 70 and then retire. But that’s not the case for many people and you could end up being one of them
I know what I’ll do next
Do you know what you’ll be doing when you retire? Most experts suggest you think outside the box to make sure that you will stay engaged. Let’s suppose, for example, that you were a financial advisor. You believe that when you retire you’ll be spending all that free time in your basement workshop. A better idea might be to volunteer to help in a shop class at a nearby high school. Or if you’d like to earn a little extra money, get a job at a Home Depot or Ace Hardware. The national organization SCORE provides opportunities for people with varied experiences to share what they have learned. If you want to continue to stay engaged in the business community, especially with young people, SCORE could be a great opportunity.
Not long ago a retiree could look forward to earning a safe 4% or 5% return on his or her investments. Unfortunately, the Federal Reserve’s policy and a weak economy have combined to change that. It’s not true now and it’s not likely to be true for a number of years in the future. You may think all you need is income but what you really need is a certain amount of return, regardless of whether it comes from capital gains, dividends or income. In fact, there is a problem with the “income only” approach because as income yields on bonds rise, you might be getting more income but your net worth is actually going down.
My expenses will go down
Does your retirement plan count on your living expenses dropping by 20%? This could be a very bad assumption. Even if you don’t have a mortgage, you may end up spending as much if not more in retirement. The problem here is that your single largest asset in retirement is time. You could easily end up spending more money just because you aren’t sitting all day at your job and you find new things to do to fill up your day. Many retirees fail to budget for spending money on their “bucket list” of leisure activities or travel. People believe that, “By gosh I deserve this,” and their bucket list turns into a priority list. You need to budget for both your discretionary and nondiscretionary spending and be realistic with both.
I’m totally covered
Another thing that retirees incorrectly assume is that Medicare will protect them from all big medical bills. But it’s not just Corvettes and cruises that can break a retiree’s budget. For example, one expense that can take a big bite out of savings is dental work. You can run up a bill of several thousands of dollars very easily replacing teeth or broken bridgework and Medicare doesn’t cover it. Of course, the biggest bills usually come from a nursing home. Again many people think Medicare covers this but that’s not true. What typically happens is that the husband goes into a home and this chews up all of the couple’s savings. The wife is still alive but doesn’t have enough to live on.
What about the new myRA?
If you have a number of years left before retirement, you might think about opening a myRA retirement account. Of course, this assumes that you can sign up for one through your employer. President Obama announced this new program in his recent State of the Union address. While there are still details to be worked out, it’s clearly designed for people who haven’t yet saved much for retirement. The way this works is that you could start by investing just $25 and then save as little as five dollars per paycheck through an automatic withdrawal. The money will be deposited into the Thrift Saving Plan that’s open to government workers. It earned roughly 1.5% last year and has shown an average return of 3.6% between 2003 and 2012. You will be allowed to save a total of $15,000 in your myRA at which point you will be required to roll it over into a traditional or Roth IRA. You would also have to roll it over after 30 years regardless of how much money you had in your fund.
How much would this help?
The short answer is not a lot. As an example of how this would work, let’s assume you deposit $100 a month in your myRA for five years. You would then have $6300 including the $300 interest you would earn. In other words, a myRA alone isn’t going to be enough to guarantee those “golden years.” And regardless of what you might believe, the returns you would get from a myRA are not guaranteed either. You wouldn’t lose your principle but your account could end up earning less than the 1.5% the Plam earned last year.
Why not a traditional IRA?
What some financial experts have pointed out is that you could do just as good or better by putting your money in a traditional IRA. You could also arrange to have the money automatically withdrawn from your checking account and deposited in your IRA account – just as with a myRA. You are allowed to deposit up to $5500 a year in an IRA and you could continue to fund it for years. Plus, you would have control over how the funds are invested. While you would not have a guaranteed return it’s likely that you could do better by investing your money in a traditional IRA then a myRA. This is because with some good financial advice you should be able to do better than the 1.5% to 3% return you would earn with a myRA.
The money you would deposit in a traditional IRA is tax exempt. In other words, you could subtract it from your income. However, you would pay taxes on the money when you began to withdraw it at age 55 1/2 or later. Alternately, you could choose a Roth IRA. This is where you fund your retirement account with after tax money but the money will be tax-free when you begin withdrawing it.