10 Misconceptions about Retirement Security

Retirement is one of the most important goals for most people. Unfortunately, many workers and retirees have an incomplete or misleading picture of how much they need to save, how to invest their savings effectively, and how to make their money last as long as they live. Clearing up common misconceptions about retirement is essential to allow people to fulfill their dreams of a comfortable retirement.

A joint project by LIMRA International, the Society of Actuaries and Mathew Greenwald & Associates identified the following 10 ways in which Americans lack a realistic understanding of retirement saving.

  1. Saving too little – Most people haven’t tried to estimate how much money they will need for retirement and those who have tried to do the calculation often underestimate their income needs.
  2. Not knowing when retirement will occur - Many workers will retire before they expect to, and before they’re ready.
  3. Living longer than planned - As individuals manage their own retirement funds, they may not understand that life expectancy is a very limited planning tool. In fact, some retirees will live long beyond their life expectancies, with a substantial risk of outliving their savings.
  4. Not facing facts about long-term care – Many people underestimate their chances of needing long-term health care. Relatively few people either own long-term care insurance or can afford to self-insure an extended long-term care situation.
  5. Trying to self-insure against long life - Although people may find guaranteed lifetime income attractive, in practice they usually choose to receive retirement plan benefits in lump-sum form. They pass up opportunities to get a lifetime pension or annuity, failing to recognize the difficulty of self-insuring their longevity.
  6. Not understanding investments – Due to the growth of the workplace retirement savings plans, workers are now largely responsible for managing investments for retirement. However, many workers misunderstand investment returns, expenses, and how each investment vehicle works.
  7. Relying on poor advice – Many retirees and pre-retirees indicate a strong desire to work with a financial professional, yet fail to see this guidance.
  8. Not knowing sources of retirement income – Workers often don’t understand what their primary sources of income will be in retirement. They may be surprised and disappointed when they try to live on the income that is actually available.
  9. Failing to deal with inflation – Inflation is a fact of life that workers may deal with through pay increases, but after retirement few people can increase their income to keep pace with the cost of living.
  10. Not providing for a surviving spouse – Many married couples fail to plan for the eventual death of one spouse before the other.

Identifying these common misconceptions is an important first step. If you recognize yourself in any, or many of these scenarios, take corrective action right away. Get an accurate estimate of your retirement income needs, identify your sources of income after retirement and understand your investment and distribution options. Take the time to educate yourself in areas of personal finance and retirement planning, and if needed, seek advice from a professional.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

5 comments
Bob smith
Bob smith

Marshall Middle asks: "Are there any accurate retirement calculators that account for inflation?"

Yes, but inflation isn't the only issue one must address. Example: A big market decline at the beginning of retirement can have a huge impact on the portfolio's longevity. How you invest your assets has a major impact as well. Inflation is only one piece of the equation.

The best calculator I have seen is here (and it's free):
http://firecalc.com/
Firecalc allows you to enter your specific financial data and then test it against historical worst case scenarios. In other words, you can see what would have happened in the past if you retired with "x" amount invested in various ways. Historical inflation is built in. It's the best calculator available, IMO. Furthermore, the forum at that particular site is frequented by relatively wealthy early retirees who really know their stuff.

Keep in mind that the future may be worse than the past. Nevertheless, planning for historical worst case scenarios should give you a pretty good idea of where you stand, and if you want to plan for worse, you certainly can. But then the question becomes this: How much of your life are you willing to sacrifice for maximum security? I guess it depends on how much you hate working. I retired at age 51. It was the best decision I ever made.

Marshall Middle
Marshall Middle

Are there any accurate retirement calculators that account for inflation?

efipo.com
efipo.com

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Jeremy
Jeremy

Good point. The study didn't really talk about taxes in this list. It really should be addressed, if not as a separate point, at least added in with the inflation piece. These are the two items that can really have an impact on an otherwise healthy sized nest egg. Plus, with many new investment vehicles with different tax implications it can really have an effect on one's retirement savings.

efipo.com
efipo.com

I would also think taxes are a HUGE one. Especially people that dont have a tax free growth retirement vehicle(such as a Roth).