The 5 Big Lies of Retirement Planning – Rande Spiegelman

When it comes to retirement planning, there’s no shortage of conventional wisdom, even if there is a shortage of actual savings. But often what passes for wisdom amounts to little more than wishful thinking. So take off those rose-colored glasses! Recognize the five big lies of retirement planning—and make sure they don’t undermine your own retirement.

1. You’ll only need 70–80% of your pre-retirement income.
Work-related costs go away when you retire, and the kids are hopefully financially independent. But other expenses can take their place, such as health care (particularly if you retire before 65, the age when Medicare kicks in), increased travel and leisure, etc. And, if you refinanced your home recently for a longer term, you may still be paying off your mortgage for some time to come. The old 70–80% income rule of thumb may still work for some folks, but it’s probably better to assume you’ll need to replace 100% of your pre-retirement income (less whatever you were saving for retirement). Consider this: Despite over half of retirees finding they actually spend as much or more in the early stages of retirement than they did before they retired, only 10% of current workers expect to spend as much or more in retirement, with 60% expecting to need 70% or less of their pre-retirement income.1

2. When you retire, you’ll be in a lower tax bracket.
Even workers in higher brackets may find that Social Security income, pensions, taxable portfolio income and retirement account distributions combine to keep them in the same or an even higher bracket in retirement. In addition, marginal tax rates are at relatively low historical levels. As recently as the 1980s, the top federal bracket was a whopping 70%! Today, the top bracket is only 35%, but even if your taxable income level remains the same, higher tax rates in the future could boost your tax liability. Unless you have good reason to believe you’ll pay lower taxes in retirement, why not plan on the same bracket when you retire? If it turns out your tax bill is lower after all, you’ll be that much better off.

3. You can always just keep working.
Part-time or even full-time work at something you enjoy can be a fulfilling way to generate extra retirement income and social interaction. But, that presumes both you and the job market for seniors remain healthy. The Employment Benefits Research Institute’s 2005 Retirement Confidence Survey found that 40% of retirees left the workforce earlier than planned due to health problems, company downsizing and workplace closure. Hopefully, you won’t be forced out of the job market prematurely, but wouldn’t it be better to plan on working longer because you want to, and not because you have to?

4. The stock market will save you.
Hopefully, the 2000–2002 bear market did away with any notion that the market can do your saving for you. For long-term planning, it’s smart to plan on high single-digit equity returns and about half that for bonds. Also, don’t assume the same return every year. Market returns (even real estate) fluctuate from year to year. Your planning should consider a range of outcomes to help assess the likelihood of meeting your goals.

5. There’s always Social Security.
With Social Security, it’s especially hard to separate truth from fiction. According to some, the status quo is fine. Others see bankruptcy as imminent. The Social Security Administration projects that the current system is sound through 2040, but beginning in 2041 benefits could be reduced by 26% and could continue to be reduced annually.2 One scenario we might see, besides benefit reductions and tax increases, is means testing, which could result in a middle-class squeeze: The wealthy aren’t eligible but are fine on their own, and the needy are entitled to receive full benefits, but those stuck in the middle get something less than hoped for. Wouldn’t it be preferable to save a little more for the future—even if it means spending a little less now—so you can treat any Social Security payments as icing on your retirement cake, rather than the main course?

Don’t be a “Gloomy Gus”
A small dose of skepticism can be healthy when it comes to conventional wisdom, but avoiding the Pollyanna label doesn’t mean you need to become a hard-core cynic. After all, a high single-digit return for stocks still means you could double your money every eight years or so, which wouldn’t be bad. And it’s doubtful that every last penny of Social Security will dry up or that every single corporate and public pension will fail. Stay balanced—don’t be overly optimistic and run the risk of failing to meet your goals because your plan depends on everything going just right, but don’t be overly pessimistic and sacrifice more of your lifestyle than is necessary.

Reality check: Spend less, save more
No other factor comes close to ensuring retirement success as the amount you are able to save. The flip side of that, of course, is how much you spend. Living below your means before retirement has a double benefit—it allows you to save more for the future and reduces the size of the nest egg required to maintain your standard of living. The alternative means growing accustomed to a lifestyle of spending you won’t be able to support when you stop working. Spend less and save more, and you won’t need to pin your hopes on wishful thinking.

Rande Spiegelman
CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research
February 23, 2006

Many times we feel that we are drowning in a world of debt and financial problems Personal Finance Mastery strives to teach people the fundamental keys to protecting and growing Wealth.

1. EBRI 2005 Retirement Confidence Survey: 38% of retirees surveyed said they spent 95-105% of preretirement income (about the same) and 14% said they spent >105% (higher).
2. See http://www.ssa.gov/qa.htm.

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