Dangerous Assumptions You Should Not Make When Planning for Retirement
Written by
Jordan Rosenfeld
Edited by
Amen Oyiboke
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Retirement is a big question mark for most people. Even with planning, there will be some gray areas and opportunities for making assumptions about what to expect or how far your money will go.
Some assumptions, however, are dangerous to your future, and it’s better to get solid information instead.
Retirement experts explain which assumptions can cause problems when retirement planning and what to do instead.
Assumption: Healthcare Expenses Will Remain the Same
One of the biggest hidden risks in financial planning is underestimating healthcare and long-term care (LTC) costs, according to Kelly Augspurger, a long-term care insurance specialist and certified senior advisor at CLTC.
“It’s a slippery slope, often overlooked until it’s too late, and can be the difference between a secure retirement and financial chaos,” Augspurger said.
Soon-to-be retirees often believe they’ll self-fund care out of savings or rely on Medicare, yet she pointed out, Medicare doesn’t cover custodial or LTC, and care costs are steadily rising. All of these costs can add up quickly.
“Underestimating monthly or annually can compound into major gaps over time,” said Augspurger.
What To Do Instead
Augspurger recommended that soon-to-be retirees model their actual costs by using “real numbers like Genworth medians of home care and facility care costs to project scenarios.” You can enlist a financial planner, as well, to help stress-test plans for multi-year care needs. “It’s reasonable to expect LTC costs to increase 4% to 5% or more per year.”
Additionally, you can choose policies with inflation protection, she said. It may not cover all inflation each year, but it will provide a buffer. If your client is 70 or older, and an inflation rider is cost-prohibitive, you can increase the monthly benefit to try to counteract the lack of growth.
Also, identify which buckets of retirement money will pay for care.
Assumption: Counting on Social Security/Pension to Fully Pay for Retirement
One of the most dangerous assumptions is that Social Security or a pension can fully fund your retirement expenses, according to Jay Zigmont, PhD, CFP, founder of Childfree Trust.
“When living off Social Security alone, you are on a fixed income and any ‘blip’ can mess you up. For example, if you are just making ends meet on Social Security and you need a new car, you won’t be able to afford it,” Zigmont pointed out.
What To Do Instead
Be sure you’re saving for retirement in multiple “buckets” and different kinds of tax-advantaged accounts, such as a 401(k) or a Roth IRA. If you receive an employer match, contribute enough to get the maximum contribution.
Most retirees overlook the importance of a tax plan in retirement, Zigmont said. “Which assets you use, and when, will have a large impact on your retirement. If you do not plan well, you may pay more in taxes during your retirement than you did in your earning years.”
Assumption: Your Retirement Savings Can Keep Up With Inflation
The fact is, you never know what the market and inflation are going to do, Zigmont said — though the stock market tends to more than balance out if you give it enough time.
“The first five years after you retire have the biggest impact on your long-term spending. If the market is down and inflation up in your first five years of retirement, you are likely to be squeezed and may run out of money.”
What To Do Instead
Diversify your investments, Zigmont urged, because “No one investment or type of investment can be relied on 100% in retirement.” This will also give you the greatest chance at staying ahead of inflation.
Assumption: Your Expenses Will Remain the Same in Retirement
While you do have some control over your spending habits (barring emergencies and other unexpected costs), Zigmont said that most people follow a spending curve similar to what is called a ‘retirement smile.’
“You tend to spend more at the beginning and end of your retirement. The beginning is often checking things off of your bucket list. The end of your life is expensive due to healthcare and long-term care costs.”
What To Do Instead
When it comes to retirement, make sure you’re always factoring in these extended costs and understand that your expenses will change as you get older and face greater health issues. Prepare in advance.
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