A common theme among Americans is the desire to retire from work at an early age to live the good life. What constitutes the good life varies from couple-to-couple. Traveling the world, spending time with the grand kids, playing golf 4 times per week are just three of the varying expectations we hear from clients who are closing in on retirement. Whatever it is you want to do in your latter years it is safe to say your expectations are for an active post-working years’ experience. In order to live the life you want in your golden years you must avoid these four common misconceptions about retirement.
Misconception #1: My Spending Patterns Won’t Change in Retirement
The inflation rate for the typical retiree is greater than the average as retirees spend disproportionally on items that have a greater rate of inflation, such as energy and healthcare. During your early years of retirement you are more likely to spend additional money on more luxury lifestyle items like travel and dining out. Additional time with the grandchildren tends to add spending as well.
When planning for retirement it is important to take into account the costs associated with both daily living as well as the lifestyle changes you intend on making.
Misconception #2: Medicare will be Enough to Pay for my Healthcare Expenses
According to AARP healthcare spending for Medicare participants, on average, will represents approximately 15% of yearly spending, or more than three times more than a non-Medicare household spends. For those over the age of 80 that amount increases to 18% of spending. Fidelity estimates that total medical spending for a retired couple is $245,000.
Prior to retiring you and your advisor should develop a retirement plan which includes a realistic assessment of the likely true cost of medical coverage.
Misconception #3: I Need to Claim My Social Security Benefits as Early as Possible
Claiming your benefits at age 62 and not at your benefit age will reduce your monthly payment by up to 30%, greatly reducing your overall income if you live beyond the breakeven crossover point of approximately 79 years of age. You reduce benefits with the lower payment amount as well as the reduced cost-of-living increases you would receive as the percentage increase would be off a smaller benefit amount. When one spouse passes away the household benefits get reduced again as the surviving spouse will receive only the larger of the two benefits that had been previously received.
Before making a decision on when to take your Social Security benefit, it is important for your advisor to do an analysis of your investments and cash-flow to determine the best age to begin taking your benefits.
Misconception #4: “I’ll Continue to Work in Retirement”
Sixty-seven percent of currently working Americans expect to work beyond age 65. Of those currently retired only 23% actually worked beyond age 65. There are a number of reasons why we retire early, including but not limited to health problems, getting downsized from a job, care for a sick family member, or simply having enough savings to leave the workforce at a relatively young age (Source).
Best to plan on a long career but live your life as if you will retire at a younger than anticipated age. You should have a contingency plan for if something beyond your control goes awry.
At Magellan Financial, we have the tools to help you with all your planning needs. To schedule an initial consultation or learn more about how Magellan Financial can help you plan successfully, please call us at 610-437-5650 or email us at Jon.Soden@wfafinet.com.