Retirement Myths


Russ Wiles The Arizona Republic

For those not there yet, retirement is a time of life veiled in excitement, 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 that don’t always stand up to scrutiny.

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

Actually, results from a survey by Fidelity Investments out last month found people still employed later in life often do so voluntarily.

Some 61% of older workers indicated they like their work, and 48% said a job makes them feel valued, according to the poll of 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% said retirement is the most rewarding time of their lives, and nearly the same percentage indicated they retired at the right time and have found it’s easier than they thought to live comfortably.

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 a limit on work-related earnings, which for 2015 is $1,310 per month, or $15,720 per year. If you collect Social Security before full retirement age (between 66 and 67 for most people currently in the workplace), 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. (For higher-earning retirees, Social Security benefits also are subject to taxation, though this is a separate issue from a direct reduction of benefits.)

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,” the Social Security Administration says.

Even if below full retirement age, you don’t really lose out, as you will get back those withheld benefits later. “Your benefit will be increased at your full retirement age to account for benefits withheld due to earlier earnings.”

Medicare pays for nearly all health care costs in

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

The Employee Benefit Research Institute 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. For a 90% chance of meeting all costs, a man would need $124,000 and a woman $140,000.

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.

A retirement portfolio will last decades if investors limit their withdrawals to
4% annually.
The 4% rule provides a good starting point, 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. But if the market drops sharply, especially in the early years, a portfolio could be depleted much faster, even if you limit annual withdrawals to just 4%.

In a recent study, researchers at WealthVest said a withdrawal rate closer to 2% is a more realistic bet for people counting on portfolios to last for decades.

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 market downturns.

Social Security isn’t the dominant source of retirement income for Americans.
Many Americans have plenty of investments to draw on in retirement, including 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.