Urban legends, urban myths, and the latest that’s on everyone’s lips–fake news. Whatever you call it, in our age of information, claims of dubious repute can go viral in minutes. Anyone with a computer can start a blog and offer up opinions on just about any subject, whether he or she is an authority or not. Sources? Who needs sources?
Alright, please excuse the sarcasm, but hopefully you know where we're going.
When it comes to retirement, there are plenty of misleading thoughts, opinions and fake news floating around out there. With that in mind, we'd like to clear up some misconceptions that surround the retirement years.
Myth #1: I’ll never see a penny of the money I put into Social Security.
If we had a nickel for every time we've heard someone utter that phrase, we'd have a lot of nickels. Sadly, if a 40-something says he is confident he will receive monthly checks, he sets himself up for ridicule among his contemporaries.
We wouldn’t disagree with the hypothesis that young people getting started in the workforce will receive a low return on contributions into Social Security, but this is a completely different argument.
Contrary to popular assertions, Social Security is not on the verge of bankruptcy, and we fully believe even those who are many years from retirement will be collecting monthly benefits when it’s their turn.
According to the 2017 annual report from the Social Security and Medicare Board of Trustees, Social Security “has collected roughly $19.9 trillion and paid out $17.1 trillion,” in its storied 82-year history, “leaving asset reserves of more than $2.8 trillion at the end of 2016 in its two trust funds.”
As an ever-larger number of baby boomers continue to retire and collect benefits, the trustees expect the trust funds to be depleted by 2034.
Thereafter, expected-tax-income receipts are projected to be sufficient to pay about three-quarters of scheduled benefits. Put another way, recipients of Social Security would receive about a 25% cut in benefits, if no changes are made to the current structure.
Of course, these are simply projections and much will depend on economic growth, job creation, and wages. Yet, it’s a far cry from, “I won’t see a penny of Social Security.”
We suspect that politicians will eventually settle on some type of compromise that will extend the life of the current system, but it may take a catalyst event that would generate enough political pressure for this to happen.
That said, we recognize that timing and strategies that can be implemented for Social Security may be complex. If you have questions, please give us a call or shoot us an email. We would be happy to discuss your options with you.
Myth #2: The stock market is too risky.
There’s no question about it, the bear markets that followed the dot.com bubble and the 2008 financial crisis were unprecedented in that we saw two steep declines in less than 10 years.
Made fearful by what they see as too much risk, millennials have shied away from stocks, according to a Bankrate survey. There has always been a degree of risk in stocks, even with a fully diversified portfolio. Yet, a well-diversified portfolio is akin to a stake in the U.S. and global economy. Moreover, the U.S. and global economy has been expanding for many decades and history tells us it will likely be bigger in 10 or 20 years.
When it comes to investing in stocks, the only resistance we typically come across is from folks who haven’t seriously entertained the idea before. We listen to their concerns, and answer with an array of factual data that’s not designed to win an argument, but simply to educate. When you have all the facts, then you can make an educated decision about what's best for you.
Myth #3: Medicare will handle all my health care needs in retirement.
If only Medicare did cover everything. But then, the cost to finance it would be much higher.
Medicare doesn’t cover the full cost of skilled nursing or rehabilitative care, according to AARP. Yes, the first 20 days of a stay in a nursing home is covered, but you’ll pay over $160 per day for days 21 through 100. And Medicare doesn’t cover stays past 100 days.
You may be paying out of pocket for personal care assistance, too. The same holds true for miscellaneous hospital costs, routine eye exams, hearing, foot and dental care.
Myth #4: Why save today when you can start tomorrow—there’s plenty of time.
This section is designed for millennials and those who are just beginning their journey in the workforce. There’s no better day to begin saving than today and we can’t stress this enough!
Here's a simple example:
Source: JP Morgan Asset Management
This is a hypothetical example and is not representative of any specific investment. Your results may vary.
In other words, Susan begins 10 years earlier than Bill, saves 20 years less than Bill, and saves $100,000 less than Bill, but winds up with $61,329 more.
For every parent or grandparent reading this, we encourage you to forward this powerful example to your kids and grandkids that are near or have already entered the workforce. It's a teachable opportunity with a simple lesson: The sooner you begin; the better off you may be as you approach retirement.
Take full advantage of your company’s retirement program. If your company doesn’t have a savings plan, there are many simple ways that you can get started. Feel free to reach out to us and we can assist.
Myth #5: Retirement is easy.
Many look forward to the day when they will no longer prepare for Monday mornings at the office. For those who face the work challenges that crop up daily, retirement may seem like a welcome oasis in the distance.
But that oasis sometimes turns out to be a mirage. Often, the transition from decades of working to retirement isn’t so simple.
For a better retirement, set goals, and not simply financial ones. Can you transition to part-time in your job? Consider part-time employment or consulting. It will ease the transition, keep you busy, and extend your savings.
Volunteer with your local church or local community organizations. Look for groups with similar interests. You’ll not only derive an enormous amount of satisfaction from helping others, but you’ll meet like-minded folks and make new friends.
Try something new. Keep up any exercise routines—and it's never too late to start a new one. Check with your doctor, who will be happy to prescribe a fitness plan that’s suited to you.
Have you ever considered taking a class? How about writing a book or mentoring someone young? Expanding your knowledge or sharing your ideas can be quite fulfilling. We've heard of retirees writing books and personal autobiographies for their kids – talk about a legacy!
The most important thing you can do to make retirement enjoyable is to stay active and keep your mind and body sharp.
This research material has been prepared by Horsesmouth
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Among the complexities of financial planning, the most common conversations we have with clients are in the areas of retirement planning. Goals and dreams will certainly vary, but there is typically one common theme – a desire for financial security. More specifically, many ask the question: How much monthly income will I have during retirement?
Situations will vary from person to person. That is why we never employ a cookie-cutter approach with our clients. Each plan must have an individual element to it. But the plans are guided by principles.
Consider this—a top rated professional quarterback, his team and their coaches tailor a game plan for each opponent they face. However, the plans are guided by the basics—the fundamentals.
In our case, we look to the fundamentals that span the financial planning spectrum.
As you look forward to retirement, let's touch on these various fundamentals and what you may want to consider in approaching them.
1. Am I saving enough in my retirement plan or 401k? Is there a matching provision that your company provides? If there is, don't pass up free money! We can't stress this enough, because too many employees leave cash on the company table. At a minimum, pick up the low-hanging fruit.
2. Do I have enough in stocks? It's a question that is bantered around often by financial professionals. For some who experienced the market declines of 2001 and 2008, there is a nagging fear that we will get battered again. It's a fear that keeps us too close to the financial shoreline and delays or prevents us from reaching our financial goals because we may be too conservative.
These are concerns we certainly understand and why we preach diversification within asset classes (numerous stocks across industries and countries) and diversification among asset classes (stocks/bonds, short-term cash, etc.). Diversification helps to manage risk.
Historically, stocks have outperformed income-producing securities such as bonds or CDs over the long-term. But we also recognize a portfolio that is 100% invested in stocks, even if fully diversified may be too risky for most individuals. It's one reason we'll often "anchor" a portfolio with securities that are not as volatile.
You won't squeeze every last dime out of a bull market—but most don't need to. It's better to have confidence when an inevitable decline in stocks occurs.
So we'll rephrase the question. Is it perhaps time to rebalance your portfolio? Do you have too much in stocks? Given solid gains over the last year, perhaps you're a bit too heavy in stocks. For some, it may be time to take some risk off the table and get you back within your proper parameters. In other words, the percentage of stocks that work towards your personal goals and tolerance for risk.
3. When should I take Social Security? This is a question that comes up often. You can take Social Security when you turn 62. Or, you can delay it until you reach 70.
While many factors will influence the timing, it's usually best to avoid the temptation of dipping into Social Security too early.
Let's look at a simple example Fidelity recently provided. "Colleen is 62 and will reach her full retirement age (FRA) at 66 (note: if you are born 1960 or later, FRA is 67). If she starts taking benefits at 62, she will receive $1,200 per month. If she waits until her FRA to collect, she will receive 33% more, or $1,600 a month in Social Security. If she waits until 70, her benefits will increase another 32%, to $2,112 a month."
That's about 8% compounded annually. Moreover, delaying results in your spouse receiving a higher survivor's benefit.
4. Do you have a pension? How should you take it? Many prefer the peace of mind a monthly check will provide, one that comes on top of your Social Security and savings. Or, you may choose a lump sum payment and roll it into an IRA.
But consider this—if you were to pass away before your spouse, do you know what impact it would have on your pension? Typically, a spouse will continue to receive a monthly check at a reduced rate if you elect a survivors benefit. Or, you may choose a reduced initial payout that continues at that rate if you pass first. If you are being presented with various pension options and aren't sure how to proceed, let's talk.
5. What are you going to do once you've retired? When you wake up each morning and are no longer going to work, what will you do? As enticing as it sounds to enter retirement and have work abruptly end, many retirees find the transition easier by shifting from full-time to part-time work.
When you do end up making the full transition, what will your new venture look like? Your new life won't have the structure it had before. Consider putting together an outline of activities and a daily or weekly plan.
Consider volunteer opportunities, exercise, and if you have grandchildren, time with them is always well spent.
Remember, retirement isn't necessarily a time to slow down. It's a time to refocus and redirect your path and embrace new experiences. Take charge and don't let circumstances dictate your future. It's a key factor to a happy and fruitful retirement.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.