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4 ‘Sure’ Things About Saving for Retirement That Aren’t

Three weeks ago, Chicago Cubs fans could hardly have been blamed for starting to think about “next year” — and two weeks ago, who would have imagined that we’d be talking about President-Elect Trump.

Sometimes life takes unexpected turns, upending even the most “certain” outcomes. These so-called “sure” things sometimes turn out to be anything but that — and those that have relied on those assumptions, these “conventional wisdoms” as “givens” can wind up being disappointed — and ill-prepared for financing retirement.

Here are four “sure” things — that aren’t.

You’ll Pay a Lower Tax Rate in Retirement

Ever since the advent of Section 401(k), workplace retirement savers have been schooled in the advantages of tax-deferred savings. While there’s something to be said for putting off rendering to Uncle Sam as long as one can, this logic is most persuasive when it’s based on a premise that when you do pay taxes, you’ll be doing so at a lower rate. This presumption — that individuals will be paying lower tax rates in their retirement future — underpins one of the primary retirement savings messages.

However, tax rates — and future income levels — are hard to predict. Both can rise more than anticipated in the future (ironically, doing a good job of saving for retirement can actually boost your income levels in retirement). And the assumption that you’ll pay a lower tax rate in retirement may not turn out to be the case.

All Target-Date Funds Are Pretty Much the Same

Even before the impetus provided by the Pension Protection Act of 2006, and the ensuing qualified default investment alternative (QDIA) regulations, target-date funds were well on their way to being the most widely used 401(k) plan investment option. They are disarmingly simple in concept and application, and yet extraordinarily complex in execution, with widely varying notions of appropriate asset allocation, glide path, fees, reliance on proprietary fund offerings, and benchmarks.

The good news for participants is that the choice of target-date fund families is still generally limited to the one on their plan menu. Good news, that is, if the plan fiduciary has done their due diligence in considering the various factors, and not just embraced the “convenient” alternative based on their provider platform. In which case, you may find that the target — or the target date — may not be aligned with your needs or expectations.

You’ll (Only) Need to Replace About 70% of Your Pre-Retirement Income in Retirement

“Replacement rates” — roughly defined as the percentage of one’s pre-retirement income available in retirement — arguably constitute a poor proxy for retirement readiness. That said, replacement rates are relatively easy to understand and communicate, and, as a result, they are widely used by retirement plan advisors and financial planners to facilitate the retirement planning process. They are also frequently employed by policy makers as a gauge in assessing the efficacy of various components of the retirement system in terms of providing income in retirement that is, at some level, comparable to that available to individuals prior to retirement.

However, embracing that calculation as a retirement readiness measure requires accepting any number of imbedded assumptions; not infrequently that individuals will spend less in retirement. While there is certainly a likelihood that less may be spent on such things as taxes, housing and various work-related expenses (including saving for retirement), there are also the often-overlooked costs of post-retirement medical expenses and long-term care that are not part of the typical pre-retirement balance sheet.

The question really is what pre-retirement income needs do you need to cover in retirement – and which new one(s) have to be considered.

If You Can’t Afford to Retire, You Can Just Keep Working

In 1991, just 11% of workers expected to retire after age 65. Twenty-five years later, in 2016, 37% of workers report that they expect to retire after age 65, and 6% say they don’t plan to retire at all, according to the 2016 Retirement Confidence Survey (RCS). At the same time, the percentage of workers who say they expect to retire before age 65 has decreased, from 50% in 1991 to 24% in 2016.

However, the RCS has consistently found that a large percentage of retirees leave the workforce earlier than planned — nearly half (46%) in 2016, in fact. Many who retired earlier than planned say they did so because of a hardship, such as a health problem or disability (55%), or changes at their employer such as downsizing or closure.

The bottom line: Even if you plan to work longer, the timing of your “retirement” may not be your choice.

It’s said that there is no such uncertainty as a sure thing. And, as recent events remind us, there are few things more disruptive in life than a sure thing that doesn’t turn out to be.