Top Five Retirement Income Planning Myths
The Top Five Myths of Retirement Income Planning
As with all other transitions in a person’s life, beginning retirement can be an exciting, yet stressful time. Ideally, leaving the rat race behind is a welcome move for many; although a lack of proper planning or an ironclad investment strategy may make it more difficult than it needs to be. To smoothly transition into the “retirement” phase of your life, you need to be prepared for all that can happen. Do a double take on your retirement planning, and make sure that you haven’t fallen prey to any of the following retirement myths, as they can be hazardous to your retirement health.
Myth 1: Your kids are self sufficient.
Some parents may still have adult children living at home. Some may have already left the nest, and returned due to financial difficulties or emotional problems. If you’ve encountered a similar “failure to launch” scenario, you may find the comforts of retirement seem ever so remote. Even if your children are off to school, or have graduated from college, you never know when they may need your financial help. Make sure that you are covered, and consider these possible expenditures, whether your kids are out on their own or back at home with you.
Myth 2: Your home is paid for.
Many people can’t help but consider a home that’s paid for as the ultimate insurance for retirement. After all, owning your home outright is part of the American dream. Many people find themselves taking out second mortgages or refinancing their homes later in life to pay for college for the kids or to help them get through difficult financial times. With people changing jobs and moving more often during their career, the prospect of staying in one place long enough to pay a home off completely is less likely than it once was. These circumstances leave many people with a mortgage payment in retirement.
Myth 3: You have no credit card or consumer debt.
Frugal living will not always keep you in the clear. As you get older, unforeseen circumstances and expenses can put you in debt if you don’t have enough emergency reserves or proper protection in place to cover you. Healthcare costs are typically the highest expense for aging individuals. Even if you manage to avoid crippling levels of debt, or live within your means by making minimal use of credit cards, there will likely be excess expenses you still need to cover. In addition, you can no longer count on the potential for higher pay (one that comes with a day job or successful business) to keep your assets in the black – you’ve retired, remember? While your job is no longer there, your expenses still are and the prospect of debt in retirement is a real concern for many retirees.
Myth 4: Earn an average of 10-12% return on your investments.
No one can guarantee that the investment markets will continue to produce high returns consistently. The most recent economic calamity is proof that the market gives and the market takes back. Even the best financial analysts and economists cannot consistently predict what will happen in the markets. You may be able to mitigate some of your risk with greater diversification and by moving some money to more conservative instruments, but this typically decreases your returns. When you begin to move your portfolio from growth to preservation, you will earn less on your money and you need to account for that in your planning. Higher income producing investments can generate more of a tax burden that should be considered as well.
Myth 5: Insurance is a poor income planning tool.
Many types of insurance policies may be great tools, especially for people moving into retirement. Guaranteed minimum interest rates for the policy result in a guaranteed minimum return for what you’ve invested. Annuities can provide you with a guaranteed income stream that can help you maintain your lifestyle in retirement or augment your other sources of retirement income. Products such as universal life insurance allow you the flexibility of paying smaller or larger premiums, depending on your financial capabilities. Life insurance is also an excellent wealth transfer tool that can help you efficiently leave a financial legacy behind for your loved ones. When you’re evaluating different insurance products, remember to watch out for non-essential coverage, superfluous deductibles, inadequate limits and unnecessary riders.