MARCH 20, 2019 • JACQUELINE SERGEANT
The mere thought of retirement for many pre-retirees can be overwhelming, if not frightening. Entering retirement comes with a lot of complex and unique risks that individuals need to consider. And with these risks often come misconceptions about planning, preparation and timing.
In its fourth edition of the Retirement Income Reference Book, LIMRA Secure Retirement has highlighted some of the myths about retirement.
Advisors can dispel these myths and better prepare their clients for when that time comes, according to LIMRA.
The following, according to LIMRA, are the most common myths advisors may have to contend with:
Myth 1: I’ll die before I am 90.
According to LIMRA, 25 percent of 65-year-old men with average health will live to age 93, and a quarter of women in that category will live to 96. The report noted that underestimating longevity risk could pose a significant threat to retirees who use systematic withdrawals, as there is a possibility of running out of money in retirement.
Myth 2: I’ll keep working and never retire.
Retirement is not always a choice. LIMRA says that over half of retirees retired earlier than they planned. About 20 percent retire because of health problems, which are not always predictabl. Additionally, 70 percent of workers expect to work in retirement or transition slowly, but just 16 percent of retirees reported they work.
Myth 3: Annuities are bad investments.
Many investors and advisors may have a negative view about annuities. However, LIMRA says nearly 70 percent of retirees who own an annuity are more confident their savings and investments will not run out if they live to age 90, compared with 57 percent of retirees who don’t own an annuity.
Myth 4: Medicare will take care of health-care costs in retirement.
Typically, Medicare pays a little more than half of a retiree’s medical bills. Average out-of-pocket expenses in retirement are around $5,400. This points to the importance of planning for the costs of Medicare supplemental and prescription plans and long-term care insurance coverage.
Myth 5: A conservative portfolio is appropriate for me in retirement.
For retirees facing 30-plus years of retirement, a no-risk portfolio of bonds and CDs is very risky, making it difficult to sustain income and fend off inflation. Advisors suggest that retirees invest a substantial portion in equities.
Myth 6: It’s best if I claim Social Security benefits at age 62.
Claiming Social Security can be a costly move when examined with life expectancy. Based on life expectancy, claiming at age 62 offers a 7 percent to 9 percent chance of receiving the highest cumulative Social Security benefits.
Myth 7: I’ll remain healthy enough in retirement to make financial decisions myself.
While good physical and mental health in retirement is the goal, retirees should plan for rising health-care costs and secure help from an advisor to manage money in retirement, considering that five percent of Medicare beneficiaries, age 65-plus, have four or more chronic illnesses.
Myth 8: My taxes will be low in retirement.
If retirees need as much income as they did during their working years to maintain their lifestyle, it is not credible to think that the tax burden will be less, particularly if the retiree needs to withdraw from retirement plan savings that are fully taxable at ordinary income rates. Top tax rates are now on the lower point in many decades.
Myth 9: I can safely withdraw 4 percent of my assets and not run out of money.
Retirement outcomes are unpredictable for most. Periods of low market returns and high inflation, if experienced in early years of retirement, can be devastating.
Myth 10: If I die tomorrow, the insurance company keeps all the money I put into annuities.
That’s the thought of many investors and advisors, but nine out of 10 immediate income annuity buyers choose to receive guaranteed income at least near or equal to their original investment.