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Retirement Lies We Tell Ourselves
By JLP | December 11, 2006
Today’s Wall Street Journal came with a special section called Encore: A Guide to Retirement Planning & Living. The cover story, The Retirement Lies We Tell Ourselves ($), by Glenn Ruffenach, is pretty interesting. The author asked financial planners, educators, and economists in the U.S. to list the dangersous assumptions that people are making when it comes to planning for their retirement. Here’s the list of 9 lies we are telling ourselves (along with my commentary since I can’t reproduce the entire article):
I’m going to work in retirement. What happens if you can’t work? Should you just assume that you are going to work during retirement? I’m sure lots of people tell themselves this when they look at their lack of retirement savings. I think this is a dangerous assumption to make.
My home is my safety net. – A home can be a safety net but what happens if you need to sell it when the market is down?
I can live on 70% or 80% of my pre-retirement income. – This is a tough one because there are so many unknowns when it comes to retirement income needs. Some costs will down while others (like healthcare) will rise. Regardless of how much you need, it is best to plan for inflation.
My taxes will go down in retirement. – Congress can change taxes pretty much on a whim. Therefore you shouldn’t assume that they are going to go down during retirement. You can help yourself out by setting up a < ahref="http://allfinancialmatters.com/category/retirement-planning/iras/roth-ira/">Roth IRA.
I’m comfortable with debt. – Personally, I would rather go into retirement with no debt. With no debt, you much more freedom.
My spouse is taking care of everything. – Regardless, BOTH spouses need to be familiar with the gameplan in case something were to happen to one of them.
I’m going to get an inheritance. – LOL! Don’t count on it. My dad had an aunt that “planned” on an inheritance and it never came! Don’t make the same mistake.
I’m going to get a pension and it’s safe. – I think we all know by now that pensions are NOT safe, even if you are retired.
I won’t need long-term care. – I remember reading somewhere that if you live long enough, chances are 50-50 that you or your spouse will need long-term care.
Are you guilty of any of these?
Topics: Retirement Planning | 9 Comments »
December 12th, 2006 at 12:06 am
Wow, who’s telling themselves any of those!? I read each one and thought, that’s dumb. Well, except the one about living on just 70%-80% of current income, I might have thought the same thing once upon a time until I used some of the retirement calculators and saw how little that was when you consider that everything is going to continue to get more expensive.
December 12th, 2006 at 12:46 am
Hmm, my spouse is in the military. That covers a portion of 1) My spouse will take care of everything 2) We’re going to get a pension and it’s safe (Uncle Sam is going to eliminate the military pensions?) 3) I do plan to work in retirement as well (as a software engineer I think this is reasonable)
All that said, I’m still putting 15K in 401k and 4K in my Roth. Still, I think some of these aren’t necessarily lies.
December 12th, 2006 at 1:07 am
I think numbers one and two are particularly prevalent. The idea of downsizing a home after the kids move out b/c you don’t need the space is very real. It’s geat for an additional nestegg. But, people use “generous” assumptions when figuring out how much they can monetize their homes. Assumptions include the listing price, the selling price, the price of a new home, taxes, moving, furnishing, flying, etc! Working in retirement? Good luck earning even a fraction of your pre-retirement income unless you’re up and running prior to retirement.
December 12th, 2006 at 10:54 am
What a list, I can’t beleive that people can honestly belive those! When it comes to retirement how can you be comfortable with debt!?! That’s just someone with their head in the sand hoping reality won’t bite them on the ass.
December 12th, 2006 at 11:28 am
I read this article and I think it’s easy to be shocked by some of them because most pf bloggers just simply know better.
The one that kills me is the 70%-80% pre-retirement income one. There have been tons and tons written on this. Do the math. You don’t need that much. Really. There are a lot of variables, but consider: 1. I currently save 45% of my income. 2. I give away almost $2000 per month for a mortgage that will be paid off by time I retire. Those two facts alone should tell you that I don’t need 80% of my income to retire.
RetiringEarly.com
December 12th, 2006 at 3:36 pm
RetiringEarly, this may be very true for both younger adults and those who are already retired, but in reality a very high percentage of the boomer generation who are geared up to retire soon do not face the same situation. Most are STILL paying a mortgage because they bought a new home in the past 10-15 years and have a typical 30-year fixed. Many people during the housing boom purchased a new home, and many upgraded to a more expensive home. My parents did it, my in-laws did it and I’d say about half of my clients I meet with who are around 50 did it. They may be retire at 65 and still have 10 or more years left on a $2,000+ mortgage. Those who retire early have even longer.
It is easy for us to see how easy it would be to live off of very little of our current income provided we don’t have a mortgage or other large monthly payments, but the reality is that most people are not in this financial situation.
December 13th, 2006 at 11:18 am
I think the point I was trying to make by highlighting my own situation is that this one-size-fits-all advice isn’t worth much. Although I don’t have the stats on how many people retire with a mortgage, I have a hard time believing it’s most people.
My parents who aren’t quite retired yet have had their home paid off for a few years already and they REALLY dragged it out with refi’s. I don’t consider them particularly financially savvy, and even they won’t have a mortgage when they eventually retire.
December 13th, 2006 at 8:55 pm
Well my first post got caught in the spam filter with the link, so let me try this again. Anyway this information is from 2000, but it shows a scary trend:
“About a quarter of U.S. census respondents aged 70 and older reported having a mortgage in 2000, up from 19.9% in 1980. The number of census respondents in their 60s with a mortgage rose to 44.6%, from 34% two decades earlier.”
In 2000 people who were just a few years from, or already retired almost half had a mortgage and 25% of those in their 70′s still had one. Those are alarming numbers and these aren’t even the boomers yet, who are generally speaking in a more difficult financial situation. I don’t see the trend they are showing reversing any time soon.
http://www.businessweek.com/investor/content/sep2006/pi20060927_200953.htm?chan=investing_investing+funds
December 16th, 2006 at 9:53 am
Interesting story. If you read the BW article, however, it’s clear that they are spinning the data so they have the appearance of a story. Saying “about a quarter” means that less than 25% of people over 70 are carrying mortgages into retirement, which means that more than 75% of those people are not. Also, looking at the trend, 25%-19.9% equals only a 5% rise over a 20 year period. That’s minuscule.
Similarly, you only have a 10% rise over 20 years for those in their 60s. That’s marginally significant. Most of these people are not retired yet. It would be interesting to know the size of the remaining mortgages for these folks, however, and whether or not these mortgages are second homes /retirement homes, or if they are on primary homes. All of these variables are important when looking at broad statistics such as these.
Finally, your comment about boomers being in a more “difficult financial situation”: For every study you show me that outlines difficulty, I’ll show you one that says they’re in great shape. In short, I think there is still a lot of debate over the condition of the boomers’ situation.
BTW, This is a great discussion to have. Take my response as fodder for healthy debate, not a defensive response.