It is quite common and perfectly understandable to worry about your retirement and whether you will have enough money to do the things that you planned in your twilight years. Following certain common myths could even ruin your retirement.
Life and your finances can sometime be unpredictable in the short term, which is why you might at some point use a resource like MoneyBoat Short-term Loans to help you out, but when it comes to long term planning, it can be bad news if you follow some common money myths, that could end up ruining your retirement.
Downsizing Will be the Answer
Many people of this generation that are approaching retirement in the next decade or so, tend to think that they will simply downsize their property, release some cash and head off into the sunset to enjoy a comfortable retirement. That may well be the case for some people, but it is a dangerous strategy and might not work out as well as planned.
Downsizing is an easier concept to imagine than it is to put into practice, especially when you look at some of the common scenarios that retirees can face. Trading in the family home for a nice luxury condo in a great location and putting some money in the bank, is not always how it works out in practice.
A lot of these condos and luxury apartments cost more to buy and run, with service charges, than you might have budgeted for. This could mean that downsizing is not always the easy-fix to your retirement that you might hope.
The Problem With Longevity
The facts speak for themselves, which is that many of us are living longer than our predecessors. This is good news in a lot of respects, but longevity has some financial issues attached to it.
Many standard retirement plans work on the basis that you will probably retire at the average age of about 65 years, and then live to the ripe old age of about 86 if you are a man or 88 if you are a woman.
There is an increasing chance that you could end up living a lot longer than average, especially if there is a history of longevity in your family. This could result in your running out of money, if you live longer than expected, so you might want to try and make some allowances for this scenario.
The Family Demographic is Changing
You may have already noticed that the family demographic has changed in recent years. This has come about due to several factors, including a tough economic climate, stricter mortgage lending criteria and a general change in attitude of the younger generation.
All of this can mean that if you are a parent, you might find that you are helping your kids financially and providing a roof over their head, for a lot longer than your parents might have helped you early in life.
Moving out to go to college or to a university and not coming back is no longer standard practice. The relevance of this shift in the family demographic is that this could put your own retirement security in jeopardy. You may not be able to put as much away as possible, if you are still paying for your kids into their 30’s.
Medicare Will Pick Up the Bill
A common myth that could cause you some financial distress in retirement is that Medicare will pay for most of your health care costs once you are in the program. If only it were true!
It is certainly true that Medicare will pay most of your health-related expenses in this situation, but retirees should definitely make contingency plans and have some money in reserve, just in case you have to find some other unexpected medical costs.
If you take a look at a typical year, Medicare covered 60% of health expenses for people aged 65 and over, with personal contributions and private insurance covering the remaining percentage. You will need some sort of Medicare supplement, sometimes known as Medigap, that will cover the costs that basic Medicare doesn’t. It will be good to have, but there is also a cost for having it.
It would be wrong to simply assume that Medicare alone will pick up all or even most of your medical bills.
The “Safe Withdrawal Rate” Will Make Your Money Last for Decades
There is a rule of thumb estimation that you may have heard of, which works on the basis that if you limit your withdrawals to a maximum 4% of your total portfolio each year, this will allow you to live off your money for decades. It is usually known as the safe withdrawal rate, and it’s based on the theory that if you withdraw no more than 4% of a balanced (between stocks and bonds) portfolio, that you will never exhaust your money.
The calculation has some merit, but it doesn’t take into account falling yields, a stock market downturn, or any number of other circumstances that could eat away your money at a rate that the 4% rule would not cope with. A prolonged bear market in stocks can quickly make the safe withdrawal theory look more than a little bit shaky.
A withdrawal rate closer to 2% would be a safer figure if you want your money to last, so you may wish to bear that in mind. Still another alternative is to set up a secondary savings source – something of a large emergency fund – that you can access in years when either you have a high level of expenses, or the financial markets are running against you. By tapping the secondary savings, you will avoid withdrawing too much money from your primary retirement portfolio.
There are plenty of myths and facts to consider surrounding retirement, but you need to distinguish between the two, otherwise it could have a ruinous impact on your retirement plans.
Nicholas Krauspe is the Head of Operations at MoneyBoat.co.uk, a London based alternative finance company providing unsecured consumer credit to residents of the UK. Nicholas has over 10 years of operations and management experience in the consumer finance sector.