Do you dream of the day you can retire, but aren't sure how to get there? You're not alone. Many people find it easier to avoid reality when it comes to planning for retirement. "That can lead to big mistakes in their retirement income planning," says Kevin O'Fee, assistant vice president of retirement strategy at USAA.
Here's a look at five common myths that could derail your expectations for income when you retire.
Myth 1: You won't be around long enough to go through your money.
The Reality: Life expectancies are at record highs in the United States, so it's important to acknowledge that you or a family member may spend as many years in retirement as you did working. According to a 2010 report by the National Academy of Social Insurance, for a 65-year-old married couple, there's a 48% chance that one spouse will live to age 90.
To help stretch your money, you can consider incorporating immediate and deferred annuities into your portfolio. These products are designed to provide income in retirement while also offering guaranteed growth when saving for retirement, explains Rob Schaffer, assistant vice president of annuity products at USAA. In addition, you will want to consider investing the rest of your portfolio to try to cover costs and outpace inflation well into the future.
For further advice on creating sources of retirement income, see this Ask June column.
Myth 2: You should get out of stocks when you retire.
The Reality: Stocks can help provide the long-term growth you need to make your assets last longer since your retirement could span several decades.
You've probably heard you should reduce your investment risk as you age. But with traditional pensions being replaced by 401(k) plans, you're wholly responsible for making smart asset allocation decisions. As O'Fee puts it, "Everyone now has to be a pension fund manager with their own money, and most people just aren't equipped to do that."
O'Fee agrees your portfolio risk should decline, but that doesn't mean getting rid of stocks entirely. Rather, regularly reviewing, and if necessary, rebalancing* your portfolio based on your risk tolerance can lock in gains from strong-performing asset classes and allow you to buy those that underperform at cheaper prices.
Myth 3: You can just keep working.
The Reality: Counting on being able to work as long as you want is dangerous, says O'Fee. Employers are feeling pressure to cut costs, and with high unemployment, finding work is always a challenge. A disability also could force you to stop working prematurely.
Many people think they can simply work longer if they don't have enough money to retire. According to a recent survey by the Employee Benefit Research Institute, 74% of workers plan to work at least part-time during their retirement years, and Schaffer notes working in retirement has become a necessity for many.
Good planning doesn't rely on good fortune. Rather, your plan should both keep you from having to work the rest of your life, and deal with the consequences of unexpected surprises that prevent you from earning a paycheck.
Myth 4: An inheritance will bail you out.
The Reality: You may be hoping for an inheritance as a potential retirement boost. But hope is not a strategy, and counting on an inheritance can create big problems if it doesn't come through.
In reality, many people who expect to inherit money never do so, says O'Fee. And even for those who do inherit money, it's often too small or comes too late to make a difference in their retirement planning, he adds. The safer thing to do is to treat an inheritance as an unexpected bonus rather than relying on it.
Myth 5: Your taxes will be lower in retirement.
The Reality: Big government deficits make future tax increases much more likely. Also, taking money out of retirement accounts, such as traditional IRAs and 401(k)s, creates taxable income that can push you into higher tax brackets.
One suggestion O'Fee offers is to consider converting part of your eligible retirement assets to a Roth IRA. By doing so, you'll pay taxes now, but you'll create a tax-free pool of money to tap in retirement. Diversifying with both Roth and traditional IRAs is a possible way to handle future tax uncertainty, adds Schaffer.
Maxed out your Roth? Here are some other IRA options.
*Rebalancing does not protect against losses or guarantee that an investor's goal will be met. Investment and insurance products are not deposits, not insured by FDIC or any government agency, not guaranteed by the Bank. Investment and certain insurance products may lose value. Investing in securities products involves risk, including possible loss of principal. The fixed annuity guarantee is against principal loss and depends on the claims-paying ability of the issuer. There are costs associated with annuities, including surrender fees, early withdrawal penalties and mortality risk expenses. Annuities do not provide any tax-deferral advantage over other types of investments within a qualified plan. Asset allocation does not protect against a loss or guarantee that an investor's goal will be met. Conversions from a Traditional IRA to a Roth are subject to ordinary income taxes. Please consult with a tax advisor regarding your particular situation.