5 retirement money myths debunked

For those not there yet, retirement is a time of life veiled in excitement but with perhaps a tinge of fear and uncertainty thrown in. Will I make an easy transition from the workplace? How will I spend my time? What can I afford to do?

Several myths and misconceptions have arisen over retirement, particularly over the financial aspects. Here are some common assumptions that don’t always stand up to scrutiny.

Myth #1: People who continue to work later in life do so because they’re forced to.

Actually, results from a survey by Fidelity Investments released last month found that people still employed later in life often do so voluntarily. Some 61% of older workers indicated that they like their work, and 48% said a job makes them feel valued, according to the poll, which elicited responses from more than 12,000 people.

That said, the survey also found that a solid majority of people, once retired, said they’re generally satisfied with their situation. Some 85% of respondents said retirement is the most rewarding time of their lives, and nearly the same percentage indicated that they retired at the right time and have found that it’s easier than they thought to live comfortably.

Myth #2:Social Security recipients will lose benefits if they continue to earn money on the job.

This issue is an occasional source of confusion. Yes, some Social Security recipients might lose benefits, but others won’t. And even in cases where benefits are withheld, they usually aren’t truly lost.

Social Security recipients do face an annual limit on work-related earnings, which for 2015 is $1,310 per month or $15,720 for the year. That amount gradually will rise in subsequent years. If you collect Social Security retirement benefits before full retirement age, your benefits are reduced $1 for every $2 you earn over the limit. In the year you reach full retirement age, $1 gets deducted for every $3 above a higher limit. Full retirement age is between 66 and 67 for most people currently in the workplace.

As noted, if you’re above full retirement age, there’s no need to worry. “Starting with the month you reach full retirement age, we will not reduce your benefits no matter how much you earn,” states the Social Security Administration.

Even if below full retirement age, you don’t really lose out, as you will get back those withheld benefits later. “The amount that your benefits are reduced … isn’t truly lost,” states the Social Security Administration. “Your benefit will be increased at your full retirement age to account for benefits withheld due to earlier earnings.”

Myth #3: Medicare pays for nearly all health care costs in retirement.

Medicare pays most health-related expenses, but retirees should have some money on the side to handle other costs.

The Employee Benefit Research Institute, in a recent update, offers savings guidelines based on probabilities. The group suggests that a 65-year-old man should plan on accumulating $68,000 to meet health costs through retirement. That amount would give him a 50-50 chance of covering all his expenses. A 65-year-old woman would need $89,000, due largely to longer expected longevity. For a 90% chance of meeting all costs, a male would need $124,000 and a female $140,000.

Myth #4: A retirement portfolio will last decades if investors limit their withdrawals to 4% annually.

The 4% rule provides a good starting point and, in the right circumstances, might allow a portfolio to last almost indefinitely. But it never was intended as a foolproof measure. Various factors can drag down your assets considerably. These include your expected longevity, expected personal costs (for health care and taxes, for example) and the allocation, or mix, of your investments.

With bond yields now near historic lows, for example, you can’t count on the fixed-income portion of your portfolio to provide much income. But even more critical is your allocation to stocks and stock funds. These investments, over time, likely will generate the growth needed to sustain your portfolio and allow for yearly withdrawals of 4% or more. But if the stock market drops sharply, especially in the early years, a portfolio could be depleted much faster, even if you limit annual withdrawals to just 4%.

Researchers at WealthVest, in a recent study appearing in Financial Advisor magazine, said a withdrawal rate closer to 2% is a more realistic bet for people counting on their portfolios to last for decades, after factoring in low bond yields, high stock prices, investment-management fees and other variables.In reality, those savings targets might be understated because the estimates above don’t include long-term care. “Medicare was never meant to cover all health care costs in retirement,” the EBRI explained. Beneficiaries pay a share of their health expenses out-of-pocket because of program deductibles and other cost-sharing rules. In 2012, the most recent year analyzed, Medicare covered 60% of health expenses for people 65 and up. Personal spending and private insurance covered most of the rest.

Whether 2% is more realistic than 4%, one key lesson is this: Big withdrawals in the early years of retirement can be devastating if they coincide with sharp downturns in asset prices, especially stock-market values.

Myth #5: Social Security isn’t the dominant source of retirement income for Americans.

Many Americans have plenty of investments to draw on in retirement, including company pensions, 401(k) retirement plans, other personal assets, housing equity and more. Yet Social Security still plays a central role for most Americans as they age.

In a survey by AARP and the Financial Planning Association, only 39% of adults who aren’t yet retired said they expect Social Security will make up at least half of their retirement income. Yet, in fact, Social Security represents a pillar of many individuals’ incomes, especially as they get older. After 80, for example, it accounts for at least half of income for six in 10 retirees, according to AARP.

The same survey (which elicited responses from more than 1,200 people ages 45 to 64 who aren’t yet claiming Social Security benefits and a roughly equal number of certified financial planners) showed ample confusion over various Social Security program features. Notable here was confusion over the impact, in terms of higher monthly payments, of waiting until full retirement age to claim benefits.

Only 9% of Americans view themselves as very knowledgeable about how Social Security retirement benefits are determined — and that might be overstated, based on responses from the financial planners.

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