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Six Myths Of Retirement Planning

14 January 2015 in Investing Insights

Key Takeaways

  • Total spending in retirement is likely higher than you think.
  • Using your home's equity may not be a practical means to fund your retirement.
  • Though admirable to save for your kids first, your retirement is just as (or more) important.

The topic of retirement is often discussed, but typically only at a surface level. One might commonly speak to their colleagues about investment ideas or the rising or falling stock market, but rarely about how it specifically affects them and their retirement plans. Meaty retirement topics are quite often ignored and unknowingly, many retirement myths begin to creep in. Instead of finding out the hard way in your retirement years, let’s dispel six myths of retirement planning right now.

1) You’ll Spend Much Less in Retirement

It’s nice to think that we’ll need less in retirement since we don’t have to set aside any money for retirement, but with the rising costs of healthcare (as shown in the chart below), total living expenses can still total 85% or more of what you were spending in those pre-retirement years.

rising-cost-of-healthcareSource: http://www.businessweek.com/articles/2014-08-13/how-growing-health-insurance-premiums-gobbled-up-workers-wages

Instead of spending a large portion of your money on housing and insurance, your expenses may simply shift into healthcare and entertainment. While you will likely be able to live on less, for example if your mortgage is paid off in full, your overall savings may not be that large, especially if you have a lot of healthcare expenses.

2) Social Security Will Take Care of You

A portion of the population still believes that they can retire comfortably on Social Security benefits. While it is possible to survive on Social Security payouts alone, it is certainly not advised as the average payout per month is $1,294 per month. After factoring out the cost of housing, food, transportation, and utilities, there is not much wiggle room left in this small payout each month. Depending on your location and financial health, Social Security benefits simply may not cover all of your monthly expenses.

The Social Security Administration themselves admit that Social Security is underfunded by 25-30%. To make the Social Security system whole again, the government can consider raising the full retirement age, currently at 66, or reducing benefits by the underfunded percentage amount – neither of which would be appealing solutions.  You will need a backup plan to offset the expenses that social security does not cover to maintain your desired lifestyle.

3) Funding Your Child’s College Fund Is Better Than Taking Care of Yourself

Parents often believe that it is noble of them to first fund their child’s education and then worry about their own retirement years later. But as we know when we board a plane, it’s best to secure your own oxygen mask first before helping others. You’ll be useless if you pass out from toxic fumes otherwise.

But let’s say you fund your child’s education over your own retirement. The child may take their education for granted since they do not have any ‘skin in the game’ which, studies show can have an effect on performance. Second, by waiting to fund your retirement, your assets may not grow to the size you desired, which will limit your flexibility and comfort in retirement.

4) You Can Always Use the Equity in Your Home

The single largest purchase for anybody is usually their house. Over time, the property could appreciate in value and end up being the largest asset in an individual’s or couple’s retirement. On paper, it is often thought that a great retirement solution is to downsize and use the funds of the house sale for one’s remaining years of living expenses, but this is not always practical or desired.

For those that have many memories in their homes, selling can be very emotional, and could exacerbate the couples’ health and overall happiness. Furthermore, some homes might collapse in value due to the hollowing out of the local economy. We all know of plenty of areas that got demolished during the 2008-2010 housing downturn. As a concept, using one’s home equity may sound practical, but it is not always a solution that functions to fund one’s retirement.

5) Your Kids Can Help You If Your Money Runs Out

Many parents assume that their children are doing well financially and can help out if their retirement income dries up. However, the stats tell a different story. The median net worth in 2013 was lower than the median net worth in 1962 in 2013 dollars. Meanwhile, the current median household income is roughly $52,000 compared to $56,000 10 years ago. If you think you’ll need your child’s financial help later in life, you might want to have a conversation now to see if that’s even a viable option.

Over the years, we’ve seen an increase in adult children living at home after graduation as student loan debt and a difficult job market make becoming independent harder. Unless your child is an outstanding achiever, you may not be able to count on them to provide you with ongoing financial assistance.

6) Just Live Off The Interest

For those who plan to build up a large nest egg, one of the major plans in retirement may be to solely live off the interest of a healthy retirement fund. As an example, with an interest rate of 3%, living off a nest egg of $1.5 million or more might be possible. But anything less seems difficult due to inflation. Can you live off less than $37,500 a year?

Money is meant to be spent. Although it is an admirable goal to try to just live off interest and dividend income, there’s no shame in drawing down principal to fund your retirement. Let’s say you’ve accumulated a respectable $500,000 after-tax retirement fund. It may be possible for the fund to last for 20 years if you draw down principal by $25,000 a year.


Retirement planning can often be complex and confusing. There are many myths that need to be dispelled as you work to achieve your retirement goals. It’s always better to end up with too much, than too little. There will be curve balls thrown along the way. But it always pays to have a realistic plan in place that takes into consideration your savings goals, your desired lifestyle needs, and how you might handle any unexpected emergencies.  So long as you stay focused on tracking your net worth, saving as much as you can, and adjusting your investments to meet your risk and time horizon needs, chances are high that everything will turn out all right.

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Photo Credit: http://www.seniorliving.org/


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  1. marshall kilduff
    21 Jan at 8:00 pm

    print is impossible to read. anyway to improve on it?

    • Nick Bear
      22 Jan at 6:13 pm

      Hi Marshall! Thank you for the feedback. We went ahead and increased the font size which should hopefully make it easier to read.


  2. Gordon Footlight
    31 Jan at 7:37 pm

    Back in 2000, we had a net worth of over a million, then the crash, major (> $50,000) medical out of pocket in 2 months, followed by the housing crash taking the value of the home from $650K to $250K. And the daughter is off to college at the same time as our annual income dropped by 70%. So, you drive the same cars for the next 12 years, the kid goes to community college for 2 of the 4 years, and we relive our spartan days as newlyweds. We are getting by, but vacations and retirement are no longer options.

  3. Reva Mohr
    11 Mar at 5:22 pm

    This is a good article in general but I noticed that regarding Social Security, there was no mention of the mandatory deduction that takes place for Medicare premiums. That’s right, no choices here. Medicare is taken directly from the Social Security benefit. For many of SS recipients, it’s $105 a month.

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  5. Mary
    3 May at 9:16 am

    What if I don’t trust the stock market? The was a time when is was stable, but there are just too many greedy people “gaming the system” for us to depend on it. Investing in real estate here. – been burned enough.

  6. Wilfredo Hernandez
    8 Jul at 9:22 am

    I guess I never realized that health care expenses could cut down on the savings yielded in retirement. I will have to budget for that more. Also, thanks for the tips on retirement fund living. I will have to look into this more. http://tisonwealthmanagement.com

  7. Gary Weigh & Associates Pty Ltd
    15 Jul at 12:09 am

    Definitely, one can’t live with his or her Social Security payout. That’s why retirement planning is very important. A retirement financial advisor will be very helpful to help boost retirement.