The 10 Myths of Retirement Planning

The 10 Myths Of Retirement Planning Splash image

Retirement planning requires a clear-eyed analysis of future needs and income. Yet many individuals view retirement through rose-colored glasses.

Here are some of the most common myths and how you can bring reality into focus.

Myth #1: You will not need as much money during retirement as you do now.

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The general rule of thumb says that you will need approximately 70% of your pre-retirement income in order to maintain a lifestyle similar to that which you currently have. This may be true if you live your current lifestyle. However, when you retire, you will have more free time for travel, leisure activities, hobbies, and other things you might like to do during your retirement years.

In addition, medical expenses will increase at a faster rate than they likely did during your pre-retirement years.

Also, your overall tax rate may not drop very much.

Myth #2: My retirement years won't last all that long.

The fact is, today individuals in their 50s and 60s are generally healthier than previous generations. Currently, if you are age 65 your life expectancy is approximately 21 years, which is a long time to plan for. And you may live longer than you may think. A "life expectancy" of 21 years means you have a 50% chance of dying by year 21-and a 50% chance of living longer.

Myth #3: You can afford to start planning for your retirement a few years before your retirement date.

In fact, it is never too soon to begin planning for your retirement. Time is one of the most powerful tools in the accumulation of wealth. The sooner you start to accumulate assets and plan for your retirement years, the better—the less you will need to set aside each year in order to achieve the same objective.

In order to achieve your various financial objectives, you need to have an active savings and investment program. This should be geared not only for your retirement years but also for the large obligations you believe will be coming up in the future such as college funding, weddings, etc. You should start to discuss and set specific goals for your financial independence at least 25 years ahead of time.

Myth #4: Social Security will provide enough income for my retirement years.

The fact is that Social Security accounts for approximately 38% of the average retiree's income. Although increases in benefits have occurred and may continue to occur, it is likely they may become less generous than they have in the past.

In addition, the age that you must reach in order to receive full retirement benefits is increasing over the next few years. Thus, it is becoming ever more important for you to accumulate your own funds in addition to whatever the government programs can provide. Social Security should be considered a supplemental benefit to your retirement financial planning and not the foundation on which it should be built.

Myth #5: I have my pension plan to provide for my retirement income and will not need any additional savings.

The truth is that without planning well in advance, it will be difficult to tell whether your pension, combined with Social Security, will or will not achieve your financial objectives.

If you are at a company that offers a defined-benefit plan, your retirement benefit will be a monthly income stream based on some percentage of your salary during the last few years of your employment at the firm and the number of years you worked there. However, most employees do not stay with one employer for a long period of time and are unable to accumulate much in earned benefits. In addition, many employers have replaced defined-benefit plans with 401(k) plans, allowing employees more say in the management of these funds.

It will be increasingly important for you to make the proper investment decisions if you are to achieve the accumulation level you need in order to live the lifestyle you would like during your retirement years.

Myth #6: Medicare will take care of my health insurance.

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Typically, Medicare pays less than half of a retiree's medical bills, and you usually cannot start collecting this until age 65. In addition, many employers are cutting back on medical coverage for retirees due to the cost. You will need to look at and plan for the costs involved for your health insurance during the retirement years and consider Medicare supplements and possibly long-term care insurance coverage. These are costs that many current workers never had, or incurred minimally, during their working years but which will be a major part of their annual budget in retirement.

Myth #7: All of my assets are in safe vehicles for long-term accumulation and do not need to be watched closely.

The fact is that all investments need to be watched. And that is true whether you are invested in more volatile but higher-long-term-growth stocks, or less volatile but lower-returning fixed-income investments. The loss of purchasing power can be a devastating risk to deal with because it happens gradually over a long period of time and many times goes unnoticed year to year. The only thing you know is that things seem to get a little bit tighter each year, but you still try to make it. By the time you realize you need to make major adjustments, it is almost too late.

Myth #8: I can always use the equity in my home to add to my retirement income.

While it is possible that this could occur, it is unlikely that this will add much to your retirement income, especially without making you extremely uncomfortable. Some areas of the country have seen price drops in homes at various time periods. In addition, other costs to maintain your home such as property taxes, repair costs, etc., will tend to increase. If you do use your home to supplement your retirement income, remember to take advantage of all the tax breaks available to you, especially when downsizing.

Myth #9: If need be, my family can always help me out.

The fact is that many people use this as an excuse for delaying retirement planning. But, in reality, no one wants to rely on other family members to help them financially fund their retirement years. If anything, these are the years when you want true financial independence and do not want to feel as if you are a burden on your family.

Myth #10: Money is everything when it comes to retirement planning.

Nothing could be further from the truth! While money is important, it is the lifestyle decisions that are really the most important concerns for your retirement years. Money is important in that it is needed in order to finance the lifestyle decisions you make. For that reason, it is important to plan as early as possible for funding the lifestyle you would like to lead.


Robert from FL posted over 5 years ago:

At retirement(year end),how to convert a 401k lump sum to a Roth IRA avoiding taxes?

George from TX posted over 5 years ago:

I don't understand the benefit ... the costs outweigh the benefits as I understand it.

1. You liquidate current IRA accounts ... which means you pay the IRS this year on your total IRA amount as "normal income".

2. You can invest the remainder in a Roth IRA, where future growth is "tax free".

Oops ... #1 forces me into approx. 50% tax bracket for the conversion year ... meaning I have to double my remaining investment to "break even" ... then, in theory, I've lost the inflation rate or "opportunity cost" in economic terminology.

Additionally, as a "retired" person, I make quarterly withdrawals from these IRA accounts - supplementing Social Security for living expenses.

Roth accounts seem to be a great idea for young people ... BUT not so good an idea for those of us who are retired.

Am I missing something?

Richard from NJ posted over 5 years ago:

I would like to hear the particulars of this posting

Paul from MD posted over 5 years ago:

You are absolutely right, Robert. I am 68 and work part time. New money I put in a Roth; but I have not touched my IRA because of the tax bite. When I start withdrawing my income will be less and the tax bite smaller.

Dan from FL posted over 5 years ago:

(63) I have the same opinion. I looked at converting and found no benefit other than estate planning. I think a Roth is treated differently and would benefit our heirs, possibly?

Suzane from NV posted over 5 years ago:

Conversion does not need to be all or nothing as I understand it. I am converting a portion of my IRA to Roth so that I will have a liquid source of funds free from AMT preference. Also, with Medicare cost brackets changing and cost for higher income rising I am trying to think about future MAGI levels. At least for a change we know what AMT will be doing for two years instead of just one.

Kevin from CO posted over 5 years ago:

I think Robert's sceanrio is an interesting one. The ROTH IRA seems to make more sense for those of us in the "planning for retirement phase". I am 51 and just converted a fair portion of my investments into a ROTH. With increased pressure on taxes, the conversion seemed wise. I now have 15+ years to contribute to it and let it grow. That being said, I am going to write the IRS a nice check this year. OUCH! Time is on my side, now I just need to invest wisely. AAII is helping me with that.

Hudson from IA posted over 5 years ago:

(34) All these comments make good sense and provide some nice perspective. I did convert all of two previous 401ks simply because I knew this was the last time I could spread them over two years. I considered doing it slowly over time, but I expect my tax bracket to increase as my income (hopefully) increases. As a younger person I made the switch, but were I near retirement I would not get too excited about a conversion unless I had a GREAT reason to do it.

Stanley from NV posted over 5 years ago:

The ROTH IRA should be maximized each year with the thought of leaving it to love ones who will benefit the most from the investment or to charity but never left to the local,state or federal governmental bodies.....

Nathan from OH posted over 4 years ago:

This is my first post so hope I can ask a question not related to the issue above?

When we start withdrawing from our investments for retirement, is it better to draw down IRAs first or non-deferred accounts?

Anthony Diana from NY posted over 3 years ago:

I make withdrawals first from my Non- IRA Accounts first, since the taxes are already paid. Once I reached 70 and 1/2 I had to take MRD's out every year or face a 50% fine from the Government. I take these withdrawal out of my Money Market IRA so that it will not effect my equity portion of my IRAs. If possible, it's usually better to wait till after you retire to withdraw from IRAs so you can pay less taxes. I did not convert to Roth IRAs, since you would have to pay up-front taxes!

Steve from PA posted about 1 year ago:

I have some issue with Myth#1. Some people say 70% some say 100% but I think they all suffer from thinking one size fits all. I would think, or hope, that most members here are investing for retirement and try to reduce or elimate debt. If you are living on $100,000 a year but are investing $20,000 a year and making mortgage payments of $30,000 a year you are really lviing on $50,000. Instead of using a percentage why not look at your current spending, remove anything you won't be paying in retirement, add in any new expenses and increase for inflation?

I also think it is a shame that there are no new or current articles dealing with retirement on the site. Retirement is one of, if not the largest reason to be investing. It would seem from the comments that a good article on IRA conversions would help a lot of the members.

Don Bain from OR posted 11 months ago:

I agree with Steve. With so many of us crossing the threshold of retirement age, and retirement/estate planning being a big important topic which necessarily overlaps with investing, AAII should be providing a lot more on these topics. AAII should even offer a whole section in print and on line covering such issues.

Personally, the idea of devoting my time, attention & energy to baby sitting a portfolio of individual stocks and other asset class investments is about as appealing as cleaning the house daily. It's not a hobby or shouldn't be another job!

JAMES from Illinois posted about 1 month ago:

I must admit I think I am somewhat better off than most retirees. I invested carefully all bonuses received during my working years and invested all dividends received except for occasionally buying a car. My income now is more than three times what it was when working. I converted my relatively small IRA to roth six years ago and have been happy with the results. I knew the tax rate would never be lower than then. A work sheet provided by TDAmeritrade indicated that my grandchildren would be a half-million dollars to the good by my converting then even with the tax bite which was substantial.

JAMES from ILLINOIS posted about 1 month ago:

I just read Don's above. I have two suggestions that have worked very well for me. First pick several very substantial stocks that pay a very good dividend (mine are in energy and consumer goods)then a couple of good bond funds (mine are municipals) that pay monthly. You will sleep very well at night. Then for the occasional speculative investments I go by the AAII Superstars who tell you when to buy and when to sell. That's the only trading I do and though I do watch the totals daily for the fun of it I don't play nursemaid to my portfolio. I have been investing since 1950.

Jim from MA posted about 1 month ago:

Sorry AAII members, no offense intended. I have just watched an excellent 2.5 hour video by Paul Merriman with a presentation you can print if needed on retirement withdrawal strategies. He also discusses asset allocations models and recommends funds. See

FYI - I have been following recommendations from several education sources

Christopher Viscomi from VT posted about 1 month ago:

A few comments:
-The percentage of income needed discussion is flawed. If much of your working years' income was spent on sending kids to college, paying for a house, family vacations, you can now spend much less. Unlike when you had children, you can now choose the off season to travel. You will likely have downsized into a smaller and less costly home.
-Once retired (but prior to age 70.5), it makes sense to use your non-retirement savings to live off of, and make a limited conversion of your IRA/403b to a Roth up to the limit of low tax brackets. For example, convert $90k to a Roth while still staying within the lowest tax brackets. This will lower your RMDs and taxes once you hit 70.5 yrs,

Matthew Moran from NH posted about 1 month ago:

The Roth IRA has tremendous benefits if invested wisely with a long term perspective. For example, ROTH, unlike a traditional IRA has no MRD and you can determine when you withdraw the income growing tax-deferred. The benefit is to have appreciating assets or likely more risky investments that also have more reward that support one's need to cover inflationary exposure. Therefore even at 60 with potentially 25 or greater life expectancy that fund if not needed or required for MRD at 70 1/2 has potential to growth appreciably from let's say 71 to 85 with you determining when to withdraw from this tax free account. Unfortunately for most of us we did not take advantage of a ROTH IRD in our 20's or 30's as they did not exist. I encourage my daughter an husband to do this now in their 20's to prepare for their future before their contributions are phased out.

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