Retirement is a significant milestone, but it’s often approached with a mix of excitement and uncertainty. Many people make assumptions about their retirement, some of which can be dangerous to their financial future. It’s crucial to replace these assumptions with solid information and careful planning to ensure a comfortable and secure retirement.
This article will explore several dangerous assumptions people make when planning for retirement, according to retirement experts, and offer advice on what to do instead. We’ll cover healthcare expenses, reliance on Social Security or pensions, the impact of inflation, and changing expenses throughout retirement. By addressing these key areas, you can create a more robust and realistic retirement plan.
Assumption: Healthcare Expenses Will Remain the Same
One of the most significant oversights in retirement planning is underestimating healthcare and long-term care (LTC) costs. Kelly Augspurger, a long-term care insurance specialist and certified senior advisor, emphasizes that this is a ‘slippery slope, often overlooked until it’s too late, and can be the difference between a secure retirement and financial chaos.’
Many soon-to-be retirees assume they can self-fund care out of savings or rely on Medicare. However, Medicare doesn’t cover custodial or LTC, and healthcare costs are steadily rising. These expenses can quickly accumulate and create substantial financial strain.
Underestimating these monthly or annual costs can compound into major gaps over time. It’s essential to factor in potential increases in healthcare costs due to inflation, which can significantly impact your retirement savings.
What To Do Instead
Augspurger recommends modeling your actual costs using ‘real numbers like Genworth medians of home care and facility care costs to project scenarios.’ Financial planners can also help stress-test your plans for multi-year care needs. It’s reasonable to expect LTC costs to increase 4% to 5% or more per year.
Consider policies with inflation protection to buffer against rising costs. If an inflation rider is too expensive, especially for those 70 or older, increasing the monthly benefit can help counteract the lack of growth. Additionally, identify which retirement money buckets will be used for care.
Assumption: Your Retirement Savings Can Keep Up With Inflation
It’s impossible to predict market and inflation fluctuations with certainty. Zigmont notes that while the stock market tends to balance out over time, the initial years of retirement are critical. ‘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 to mitigate risk. ‘No one investment or type of investment can be relied on 100% in retirement,’ Zigmont advises. Diversification provides the greatest chance of staying ahead of inflation and protecting your retirement savings.
Assumption: Your Expenses Will Remain the Same in Retirement
While some expenses may decrease in retirement, it’s common for retirees to experience a spending curve known as a ‘retirement smile.’ This pattern involves higher spending at the beginning and end of retirement.
‘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,’ Zigmont explains.
What To Do Instead
Factor in these extended costs when planning for retirement and understand that your expenses will likely change as you age and face greater health challenges. Preparing for these fluctuations in advance is essential for financial stability.
Planning for retirement involves navigating numerous uncertainties. By avoiding dangerous assumptions and proactively addressing potential challenges, you can significantly improve your chances of a secure and fulfilling retirement.
Key takeaways include accurately estimating healthcare costs, diversifying retirement income sources, understanding the impact of inflation, and anticipating changes in expenses throughout retirement. Seeking advice from financial experts and regularly reviewing your retirement plan can further enhance your preparedness.
Ultimately, a well-informed and adaptable retirement plan is your best defense against the unexpected, ensuring you can enjoy your golden years with peace of mind.
Leave a Reply