The venerated four-percent rule states that retirees can safely withdraw four percent of their retirement…
For many people, retirement involves a plunge into an unknown realm for which they are not sufficiently prepared. Like every life transition, retirement goes much more smoothly with proper planning. Here are four misconceptions that many people have about retirement.
1. Your expenses will decrease. A commonly held rule of thumb is that your income in retirement should equal about 70% of your pre-retirement income. This takes into account that you’ll no longer be commuting to work each day, no longer purchasing work attire, and no longer contributing to Social Security, 401(k)s, IRAs, and savings accounts. On the other hand though, you’ll also be more free to travel, visit friends and relatives, and engage in those hobbies you’ve been putting off. Many people actually find their retirement expenses are 100% of their pre-retirement expenses, or even more. You should carefully consider the type of retirement lifestyle and activities you will want to have, when deciding how much income you’ll need.
You will also need to take into account healthcare costs. These increase significantly for many people as they get older, and the cost of healthcare is rising. You will have Medicare supplements and possibly long-term care insurance.
2. You will have plenty of free time. Although many people do end up sitting around the house, others find they’re even more busy than before, with hobbies, volunteer activities, and possibly part-time jobs. Many financial advisors have retired clients wonder how they ever found the time to work before they retired. As you approach retirement, you’ll want to plan out your activities to make the best use of your day.
3. You’ll automatically have enough money to live comfortably. The uncomfortable truth is that too many people have insufficient savings to provide the lifestyle they envision. Many people approaching retirement have failed to plan and budget for the next phase of their lives, instead assuming that somehow it’ll all work out. You might consider consulting a financial advisor to help plan out your retirement finances. A common mistake is to try to make up for lost years of savings with highly risky investments. Another is to invest too conservatively in retirement, which increases the chance that your funds may run out during your retirement, which may last for 30 years or more.
Inflation is another factor to consider. The current low-interest-rate, low-inflation environment has gone on for a while, so it’s hard for people to envision the value of their dollars eroding by 10% per year.
4. Retiring is stress-free. While the majority of retirees are satisfied with their new lives and the timing of their retirement, there’s no escaping the fact that retirement is a major life milestone. While many people picture it as a blissful time of being on permanent vacation, for lots of people the transition to retirement actually involves some stress. For most people it’s the first time since childhood that they do not go to a workplace each day. There’s loss of social contact with coworkers, loss of structure in your day, and, of course, loss of a paycheck.
Without proper planning, many people are at first unprepared for suddenly being entirely on their own. Proper financial and psychological preparation can greatly ease the transition to retirement and make it as satisfying as you expect.