|Copyright:||(c) 2011 The Grand Rapids Press|
|Source:||Advance Publications, Inc.|
We haven’t saved enough, too many of us retire without financial security, and we may need to work longer to achieve it — assuming we can hang onto our jobs or find new ones.
No wonder that workers and retirees are more pessimistic about their future prospects than they’ve been in years.
The outlook shouldn’t remain that glum if the economy keeps improving. But it’s critical to understand how retirement has changed.
The old rules continue to be rewritten; only 15 percent of private-sector workers still have traditional pensions, for example. And it’s increasingly left up to individuals to ferret out the long-standing financial guidelines that no longer make sense. Here’s a look at some retiree money myths and the facts behind them:
1Medicare covers all important health care costs.
Big changes are coming to coverage by 2014, when the landmark new health care law takes full effect. They probably won’t eliminate one of the most persistent misconceptions about retirement, however: that your costs are largely taken care of by
The average person 65 or older spent
Retirees should consider purchasing a Medicare Supplement (Medigap) policy for roughly
2Retirees spend much less.
The face of retirement has changed. The old stereotype of seniors spending quiet time on the back deck has been replaced by a far more active lifestyle. That means the amount you spend in retirement can rise because of travel, hobbies and other leisure activities in the initial years of retirement.
About half of retirees surveyed by the
Because retirement spending habits vary so widely, many financial advisers frown on the traditional rule of thumb that you need 70 to 80 percent of your pre-retirement income to maintain your lifestyle. To be safe, they say, you should plan on needing 100 percent.
Analyze what you expect to spend in retirement in order to lessen any anxiety. Will your mortgage and any loans for the kids’ college tuition be paid off? You still might spend heavily on travel and the grandkids. And don’t forget to consider taxes — income, sales and property — wherever you’ll be living in retirement.
3Bonds are the best place for your money in retirement.
Although retirees need to protect their savings, there is such a thing as playing it too safe. Bonds aren’t a great place to stash cash for the long haul. And their outlook has soured.
The weak forecast is linked to the near-certainty that short-term interest rates, which are currently near historical lows, and inflation both will increase. When the Federal Reserve inevitably raises rates, prices for bonds with locked-in rates will drop. That’s because investors will be able to buy newly issued bonds paying higher interest. And inflation will erode the value of the bond income that retirees may be counting on.
Many investment advisers recommend seeking more income by investing instead in companies with a history of increasing their dividends, such as
If inflation returns to its historical average of 3 percent or more, prices will double during the course of a 25-year retirement.
4Social Security is going away.
The fear that
That means the worst-case scenario probably is a reduction in benefits starting a quarter-century or so from now. And it can be avoided if
5You’ll be in a lower tax bracket when you retire.
This isn’t the automatic scenario it might seem to be. Federal income tax rates, now low by historical standards, are likely to increase as the government addresses its nearly
Another factor is the impact of paying off your mortgage. If you pay off the debt, you lose the tax deduction for your interest payments, which will in turn increase your taxable income.
Thus the combination of income from