Myths vs. Reality

How do your clients’ participants envision their retirements? Are they riding astride unicorns on cotton candy tufts of cloud? Or are they Sisyphus, endlessly pushing to an idyllic summit they’ll never reach? A recent blog entry outlines five myths concerning retirement planning that may help plan administrators and service providers understand the choices participants face and the factors they may be considering.

“Five Retirement Planning Myths,” an entry in Charles Schwab’s “Insights & Ideas” blog, takes a look at assumptions about retirement that offer some insight into why there can be disconnects between expectations and reality regarding the end goal participants desire and the way they set their course toward it.

One Can Always Keep Working

A hefty 80% of workers plan to continue working in some capacity after retiring, according to an Employee Benefit Research Institute (EBRI) study that the blog cites. And a strong majority of them plan to do so in order to keep revenue flowing in.

But sometimes unknown unknowns arise that thwart an expected course of action. That study, Charles Schwab observes, found that more than 40% of respondents who had retired did so earlier than they had planned — some for ill-health, some due to layoffs, some because the employer closed, some for other reasons. Whatever the reason, an unexpectedly early departure can derail an envisioned retirement if savings before the bump in the road were not sufficient.

70%-80% of Pre-Retirement Income Will Be Sufficient

This is an old rule of thumb that may have run its course, the blog entry suggests. It assumes that a mortgage is satisfied, children are grown and independent, and that work expenses are a thing of the past. But — if saving before retirement had not been aggressive and/or those factors are not present, or some other expense such as health care or travel arises, the old maxim may not hold true.

Retirees and Tax Brackets Are Lower

Marginal tax rates are lower than they’ve been in 70 years, the blog says, and are unlikely to drop much more; in fact, it is possible they could rise in the future. Not only that, even retirees have income — and at least some of it may be taxable. “Unless you have a very high pre-retirement income, it’s safer to assume that you will keep paying taxes at roughly the same rate after you stop working,” says the entry.

The Stock Market Is a Safety Net

The market has been performing well of late, and while that is a positive development, the blog suggests that even such gains can entail a pitfall. “It’s easy to forget that you may not see the kinds of returns going forward that you saw in the 30 years prior to 2000,” it says; it adds that, “The market declines of 2002 and 2008 should have convinced most people that this is not a reliable assumption.” The blog suggests not assuming that returns will remain the same year to year and cautions that market returns are no substitute for saving before retirement.

Social Security Is Another Safety Net

Some expect that Social Security as we know it will be their main source of income in retirement. Others expect it will not benefit them at all. “Both scenarios are highly unlikely,” says the blog. Its writers add that in their view, “Social Security is likely to be a valuable resource for many retirees,” but that it will only cover some retirement expenditures and that retirees will need additional savings to cover their expenses.