Tuesday, May 22, 2018

7 Myths About Finances in Retirement



In many ways, retirement is unknown territory. After spending several decades in the workforce, bringing in income and saving for the future, you now need to spend and manage that money.
Stepping into this new phase of life sparks change for your finances and lifestyle. “It is hard to grasp the concept of not having that paycheck to receive every other week,” says Dawn-Marie Joseph, president and founder of Estate Planning & Preservation in Williamston, Michigan.
For most individuals, regardless of the time and energy you've spent planning for this period, there will still be some surprises once you enter retirement. Here are some of the most common financial myths about retirement, as well as the truths and realities behind them.
1. Medicare will cover everything. You become eligible for Medicare the month you turn 65, but it’s important to remember there will still be ongoing health care expenses. “Medicare only covers some services for free,” says Jennifer Myers, a certified financial planner and president of SageVest Wealth Management in McLean, Virginia. Unless you qualify for Medicaid, you’ll need to budget for costs such as premiums, copays and deductibles.
You’ll also likely need a Medicare supplement plan, which can be affordable but not free. And keep in mind Medicare only provides some coverage for long-term care. You may want to think about purchasing long-term care insurance to help pay for additional services.
2. I will only need 70 to 80 percent of my pre-retirement income. While your list of expenses won’t include job-related costs like an office wardrobe and commuter expenses, it could easily be filled with other items. You may find you want to spend money on activities such as traveling, eating out, going to the theater or taking up a new hobby. “People are healthier and more active in today’s society than generations past,” Joseph says. “This means they need more money to go out and do what they would like in their retirement.”




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3. Taxes will nearly disappear in retirement. Since you’re no longer bringing home a paycheck from working each month, it can be easy to think that taxes will decrease in retirement. Even though taxes can fluctuate greatly depending on where you live and your overall financial situation, you’ll likely need to plan on paying taxes each year.
Some states exempt pension and Social Security payments as taxable income, but they’re still largely subject to federal taxes. Another factor to consider is the amount you have in qualified retirement plans, such as IRA and 401(k) accounts. “Distributions from these accounts are generally fully subject to ordinary income taxes,” Myers says.
4. Downsizing will lead to further savings. A common retirement transition plan involves moving out of the family home and into a smaller place. You might assume this shift will lead to fewer home-related costs, but that’s not always the case. For example, if you move from a large home in the suburbs to a smaller place downtown, you may find the new urban location to be more expensive.
Some retirees come to regret the shift to smaller spaces, as it can be difficult to host family gatherings and accommodate grandchildren. And it can be pricey to move back into a larger home if you regret downsizing. “Reversing a house downsize will inevitably be costly, and retirees may find themselves buying back into an expensive suburban market that they had previously sold out of,” says Michelle Herd, senior client advisor at TFC Financial Management in Boston.
Rather than selling quickly, take some time to consider your lifestyle before downsizing. “This provides some flexibility in terms of getting to know how time in retirement will be spent, where it will be spent and with whom,” Herd says.
5. $1 million will provide a comfortable retirement. For years, building a $1 million nest egg was often considered a solid goal for retirement. However, that figure may no longer be accurate, due to longer life expectancies, increasing costs and active lifestyles. “There’s no one-size-fits-all amount of how much to save for retirement,” Myers says. “If you’re accustomed to a frugal lifestyle or you’ll be receiving a healthy pension, $1 million may be plenty to live on. If not, there’s a high chance it could be inadequate.”

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6. I can withdraw 4 percent each year from my portfolio. The 4 percent rule refers to the concept of withdrawing 4 percent from a retirement account each year. The idea is that by following this strategy, you’ll be able to maintain a steady stream of income while keeping the funds sustainable for decades. “This may have been a reasonable standard in years past, but with increased life expectancy and recent challenges, many folks are largely underfunded for retirement,” says Tom Terhaar, an investment consultant with Conrad Siegel, a mid-Atlantic investment advisory firm. “Going forward, if individuals continue to subscribe to this rule, they may find themselves short of their goals.”
A better approach may be to consider withdrawing a lower percentage, such as 3 percent, each year. Talk to your financial advisor to fully evaluate your situation and determine the amount that will work best to cover your needs and sustain funds. You may also want to consider taking on part-time work to help avoid the risk of withdrawing too much from your portfolio during the early years of retirement.
7. I’ll save money by aging in place. Once you’ve settled in the home where you want to spend your retirement days, it may seem that avoiding a move to an assisted living center or nursing home will lead to substantial savings. Yet there could also be plenty of expenses to stay in your place and receive the right level of care. You might need to make modifications, such as putting in a bedroom on the main floor, adding a wheelchair entrance or bringing in home aides to help with cleaning or overseeing a health condition. “While you may be saving money by staying in your home, you could be spending even more on the care front,” Myers says.
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