A secure retirement is certainly concerning in these economic times. A trusted financial professional can help you through your concerns and misconceptions that could cause irreversible financial mistakes.
Overland Park, KS (Vocus) February 26, 2010
Is your retirement going to be put on hold? The Roth Companies offers a few tips for a comfortable retirement. "We will examine some misconceptions so you can understand and overcome these hurdles to an affordable retirement. A secure retirement is certainly concerning in these economic times. A trusted financial professional can help you through your concerns and misconceptions that could cause irreversible financial mistakes. If financial security is of concern, then read on."
Misconception #1: Taxes Won’t Have a Major Effect on My Retirement
If you take one dollar and double it 20 times the total is more than one million dollars ($1×2 = $2; $2×2 = $4; $4×2 = $8; and so on). But here’s the really interesting part: If you tax the gain at just 31% each time you double that dollar, you won’t end up with $1 million. In fact, you won’t end up with even $600,000. Surely it’s at least $100,000, right? Nope, when the return is eroded by taxes, you end up with just over $36,000. The power of compounding is that powerful, and the cost of taxes is that harmful to wealth creation. Look at the balance in your IRA, 401(k), 403(b), or 412(i). Now deduct 35% from that. That number doesn’t feel as good. But reality is that not all of that money in the account is yours; Uncle Sam has a mortgage on your retirement account -- he will get his cut. It’s like that with your money. Small differences in the way you structure your financial life can have a big impact on the results you get and on the amount of taxes you pay -- or don’t have to pay. We must remember: it’s not what you make before taxes, it’s what you keep that counts. That’s why we each need to make sure we’re planning from a net, after-tax perspective.
Misconception #2: I can be comfortable in retirement on less than I make now
You have three choices for retirement income: more than you need, the right amount, not enough. Sadly, of those who do plan, most try to figure out what they will need and come up with some figure less than they need now. Sorry, wrong answer.
This is a unique time in history. You are facing challenges today that Americans have not faced for many generations, if ever. The good news is people are living longer, living healthier and are more active later in life than they’ve ever been. The bad news is that because people are living longer there is a mounting financial crisis. Many people -- thousands who think they’re okay today -- may have incomes that expire before they do.
There is a confluence of forces at work: a population that’s living longer than any generation in history, the hardly perceptible erosion of purchasing power by inflation, low interest rates, increased stock market volatility, a Social Security system that cannot be sustained in its current status and fewer employer-sponsored pension and healthcare benefits in retirement.
All this is transpiring just as the largest generation in the history of this country is beginning to retire: the baby boomers. Although the effects aren’t visible today, these forces are welling up like a tidal wave in the middle of the ocean. The effects on the shore aren’t seen until the forces converge there… and then it’s too late.
According to a survey conducted by the Employee Benefit Research Institute (April 2006), people today have a lot of misconceptions on where their retirement income will come from and how much they need.
Among the key findings were:
- More than half of workers saving for retirement report total savings and investments (including the equity in their home) of less than $50,000.
- Many workers are counting on employer provided benefits that are rapidly disappearing if not already gone.
If you think you can get by on less, guess again.
Misconception #3: Life Expectancy Averages Matter
When it comes to retirement income planning, life expectancy figures can be severely misleading. Many people will outlive their own life expectancies. This means that most people ought to think long and hard about longevity risk -- the very real possibility of living 20, 30, or 40 years (or more) past retirement age.
The odds of at least one member of a 65-year-old couple reaching 92 are 50%, and there is at least a 25% chance of one of them reaching 97. (Source: Society of Actuaries, Annuity 2000 Mortality Table.)
There has never been a generation in history that has been faced with a challenge of the magnitude and scope that faces you today. Your retirement may last as long as your working life. What happens if you do live to be 95, 100, or beyond? If you retire at 60, you may need income for another 35, 40, or possibly even 50 years. Will your income last as long as you do?
Misconception #4: Market Averages Matter
One way to misunderstand raw information is to confuse abstractions with reality. Market averages are such an abstraction. Averages do not actually exist. Market results exist -- and nothing compels actual market results to obey averages. Let’s look at an example. Looking back from 1926 through the end of 2006, the S&P 500 stock index averaged about 10.4 percent annually according to Ibbottson Associates. But out of all those 81 years, how many times did it actually provide a calendar year return between 10 percent and 11 percent? Did you guess 20? 30? 10? Try one. Just one. Is that too narrow of a band? Then let’s find out how many times the market’s return was between 8 percent and 12 percent. Surely 30 or 40 of those 81 years, right? Actually, the market’s return was in the 8 to 12 percent range just four times. In fact, the market’s loss was greater than 20 percent more times than it returned a gain of 8 to 12 percent. But that’s only part of the story. The market’s gain has been 20 percent or greater 31 times out of those 81 years. The stock market’s returns don’t go in a straight line -- they never have. Expecting a return of 10 to 11 percent each year would have left you feeling a little off course in 80 of those 81 years. Making sure your plan is up to task requires planning for the inevitable times investments will under-perform their historical averages.
Misconception #5: I Don’t Need to Worry about Long-Term Care
Do you have long-term care insurance? Most people don’t. And why is that? There are basically two answers to that question. Number one: “It” will never happen to them. Number two: It’s too expensive. When you think about the threats to your retirement savings, most people usually think about market losses. Oftentimes, it is not market related events but catastrophic life events, like illness, that wreak havoc on retirement savings. If you had a spouse or family member that needed healthcare, how much of your retirement would you be willing to spend to help that person? All of it? I would, too. When it comes to dealing with healthcare risk late in your life, you have two choices. You can hold the risk yourself or you can spread the risk around. If you don’t have long-term care insurance, you have to ask yourself an important question: Would there be any financial strain if your expenses went up $60,000 or $90,000 or even $120,000 per year over what you anticipate? If you haven’t taken care of the matter, no one else will pick up the bill for most long-term care. Think it won’t happen to you? Well, hopefully not. But the fact is that 43 percent of Americans age 65 or older will spend some time in a nursing home. Seven in 10 couples (65 and older) can expect one spouse to need long-term care. And yet, in a recent survey by the American Healthcare Association, 76 percent of the people surveyed said they do not expect to need long-term care in the future. There is a tremendous disconnect between the expectations and the facts. What about the argument that long-term care is too expensive? Well, all insurance is too expensive if we never use it -- but a bargain if we do. In any case, you can reduce the cost of long-term care insurance by tailoring it to your unique needs. This is done by adjusting one of the four main components of a traditional long-term care policy:
- Elimination Period -- How long from the time you start needing it until it starts paying?
- Coverage Period -- The length of time the coverage will pay benefits.
- Benefit Amount -- How much it will pay per day or per month?
- Riders -- These can range from inflation riders (how much the amount of coverage will go up each year to cover increases in cost of living), to indemnity (to cover additional costs of medication), to a return of premium rider (which may return what you paid to your heirs in the event you don’t use the benefit in your lifetime), as well as many others. By adjusting the amount of coverage in any one or more of these four, you will probably be able to create a long-term plan that fits both your risk tolerance and your budget.
If you would like help in planning for your retirement or just have some questions please contact Duane at The Roth Companies at 913-693-7684 or check out http://www.therothcompanies.com .
Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC, Investment Advisor Representative, RDA Financial Network, a Registered Investment Advisor, Cambridge and The Roth Companies, Inc. are not affiliated.