When it comes to retirement, many people think that what was true for their parents and grandparents still holds true today.
You may have seen your grandfather retire at age 62, collect a pension and Social Security for a dozen or so years, and think this scenario will be feasible for your own retirement.
Or perhaps your Depression-era grandmother refused to give up her frugal ways despite having ample savings and chose to live out the rest of her life without ever enjoying a penny of what she’d scrimped and saved.
But retirees or near-retirees who are stuck in the past could be making grave mistakes that could ultimately cost them their long-term security.
Most people from earlier generations didn’t spend their retirement years taking exotic river cruises or exploring remote locations halfway across the world. And, chances are, they didn’t live long enough to incur many medical costs that threatened their thrifty lifestyle.
The realities of a digital-based society that has put a greater onus on the individual to save for retirement have also changed some of what used to be true. Pensions are fading away. Social Security’s long-term viability is in question. Health-care costs are expected to keep rising.
“Don’t just do something because your dad did it and your grandma did it. Take a look at how things are today and make good decisions going forward,” says Jeremy Shipp, founder of Retirement Capital Planners, a registered investment advisor in Glen Allen,Va.
Here, then, are a few retirement myths to be aware of.
The notion of paying off a mortgage before retirement came from the Depression-era 1930s. At that time, mortgages were callable and banks could foreclose absent prompt payment. The industry doesn’t function that way nowadays, Shipp says. “You don’t want to use Depression-era economics in the digital age,” he says.
Instead of accelerating mortgage payments, Shipp says retirees—especially those paying interest of 4% or less—should consider what else they could do with that money, like invest it and get a higher rate of return. Retirees paying higher interest rates, say around 6%, who have five to 10 years remaining on the mortgage should consider refinancing for a 30-year fixed-rate mortgage to take advantage of the falling interest-rate environment, he says.
People nearing retirement may be hesitant about taking a new 30-year mortgage, Shipp says, but there can be advantages. For instance, refinancing can lower mortgage payments and allow retirees more access to liquid capital that can be used for other expenses, or for investing. Also, factoring in inflation, the real cost of their housing goes down over time. Even for retirees who plan to move in a few years, refinancing can free up cash that can be used to help them relocate or do other things they want to do, he says.
Most people think they won’t get a divorce when they are 60 or 70 years old, but it’s not true for a growing number of people, according to Haleh Moddasser, senior vice president and lead advisor in the Chapel Hill, N.C., office of wealth-management firm Stearns Financial Group.
People are living longer and healthier lives, and with greater life expectancy, a retirement that used to last 10 to 15 years has turned into 20 to 25 years. Given this reality, she says, more people in unhappy marriages are considering their options.
“The boomers are the first generation of people embarking on gray divorce. Their parents and grandparents didn’t do this,” she says.
Moddasser’s concern is that many people—women especially—are counting too heavily on having a certain level of combined assets for financial security. Working closely with a number of older women who are thinking of leaving their husbands, she helps them understand their financials, discussing for instance, the merits of long-term care, continuing to maintain life insurance on the ex-spouse, if possible, and continuing to work as a means of financial support, if necessary.
Some women are afraid they can’t work into their 60s and 70s, she says, but that, too, has changed due to technology. The internet has allowed people to showcase their talents later in life, Moddasser says. “It’s providing opportunities for them not to be put out to pasture.”
Many retirees won’t have mortgage payments, commuting costs, and expenses related to maintaining a business wardrobe. But when other expenses such as travel, additional leisure activities, and health care are factored in, most times people end up spending just as much in retirement as they did when they were working, says John Iammarino, president and founder of Securus Financial, a wealth-management firm in San Diego.
He offers the example of a 60-year-old client who is planning to retire next year. She and her husband no longer have a mortgage, but the money they were paying for that is going to be used to pay for medical expenses, Iammarino says. As soon as the wife retires, she will have to set aside $1,200 a month—at today’s costs—for her health care for the next five years until she is eligible for Medicare. On top of that, she and her husband also have to pay about $250 a month for the husband’s Medicare. People are living longer and have increased medical costs. Once you add that up, the cost becomes quite hefty, he says.
Beyond burgeoning health-care costs, there are vacations, new personal items and gadgets, tools for the home, and presents for children and grandchildren. All these things and more have the potential to eat through retirees’ cash at a faster rate than before they left the workforce, says Shipp of Retirement Capital Planners.
Retirees have more time on their hands and the ease of purchasing things online, along with being bombarded by digital advertising, can lead them to burn through cash if they aren’t careful. “Little purchases a few times a week can add up pretty quickly,” he says.
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