Retirement Myths Debunked (Part II)

Myth #6 – You need that initial level of retirement income, indexed for the rest of your life.

I’m sure you can come up with a list of things that don’t fit the “set it and forget it” philosophy. Set the cruise control and forget it. Set the room temperature and forget it. Invest in a certain investment that has a particular risk associated with it and forget it. You need to make adjustments as the situation changes, as your needs and priorities change. Retirement income planning works like that.

Retirement isn’t one long vacation. It isn’t one period in your life. It represents the longest set of phases in your life. Each phase will have different needs for cash flow.

You’ll need more money in your early, active years. You then settle down to a more normal retirement where expenses drop. Then late in life, poor health, the loss of your spouse or partner, losing your driving license and your attitude and behaviour will cause you to spend even less money.

Yes, you may require money for long term care needs, but hopefully you planned for that before your retirement so that those needs aren’t coming out of your regular cash flow late in life. The amount of money you’ll need and the most efficient means of getting are important points you should review yearly. Set up an investment and income stream that is flexible and adaptable to changing circumstances. Stress test the plans, strategies and components to make sure they continue to do the job they were designed to do. Life changes and your needs for income will change with them.

Myth #7 – You’ll have enough money to last through retirement as long as the average rate of return matches your plan

Some rules of thumb and long held assumptions may work well while you are saving for retirement. Holding on to them when you are spending those savings during retirement may become toxic to your financial health.

Averages can be very misleading when applied to rates of return during spending periods. The pattern of returns can dramatically impact the size of your assets when you are withdrawing money to provide yourself an income to meet expenses.

When you need to withdraw money and the markets are down, or what you take out is less than what your investment is earning, you eat into your retirement nest egg. These losses can be difficult to recover because you have to make up for the lower rate of return in a given year and account for the money you spent that is no longer invested. Negative rates of return in the early years of spending can be devastating on how much money you will have left 10, 15 or 20 years down the road, even if the long term average rate of return matches your plan. It’s not just about average rates of return; it’s about the sequence of returns that make up the average.

Starting with a low or negative return has the potential to permanently upset your plans.

Myth # 8 – The government will take care of medical expenses

At the risk of sounding cynical, governments don’t pay for anything. Working Canadians do. Taxpayers do. Taxes are directed to certain areas of need. Growing needs and rising costs means that there isn’t enough public money to go around. That reality is hitting retirees and will continue to hit them harder as time goes on.

Our rapidly aging society is backing governments into a corner forcing our leaders to make tough decisions on health care. It seems that there are already too many elderly people to care for with existing programs and funding. Absolute costs are going up while services are being cut back. Get used to it. You are going to have to channel more income into paying for uncovered services or eat into your long-term savings to take care of yourself and your aging family.

Our society is moving quickly from child care issues to elder care issues. And the latter issue is much more expensive and long lasting. The movement now is pushing care out into the community. That sounds good and has some merits. But long-term care is not free. Much of it is provided by family. It’s voluntary. It means sacrifices of energy, time out of the workforce and hits to the retirement savings plans of caregivers. The government is not picking up the tab.

Myth #9 – I can deal with a shortfall in retirement savings by working longer or taking up some part time work.

Recent studies have found that almost half of retirees left the workforce earlier than planned. Downsizing, layoffs and negative working conditions were some of the reasons. People ages 55 plus have an average of more than 13 months on unemployment. That’s almost 5 months longer than younger people looking for jobs. (Source: Associated Press, AARP Public Policy Institute 2012)

The biggest reasons for leaving the workforce early were health related – either the worker’s or someone in the family. Working longer is not an option you can definitely count on because staying on the job or getting another job is not a given. Almost two thirds of retired Canadians had less than a year to plan and adjust for what could be 30-40 years of retirement.

(Source: LIMRA Retirement Study, 2012; Retirement Myths and Realities Poll, 2013)

The Bottom Line

Be proactive when planning your retirement and remember: the earlier you start, the better! Healthy retirement planning will help ensure a more successful retirement. Contact your financial expert to get started today!

 

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