As investors, we hope to find ourselves making good decisions the majority of the time.  However, we may sometimes make bad financial decisions based on what we believe to be true.   Just because you read it online or hear it from a friend, doesn’t make it true. So, how much do you know?  Let’s take a look at some of the common misconceptions when it comes to retirement planning.

#1:  My investment allocation in retirement should be conservative

Conservative may be a relative term, depending on your own risk tolerance.  However, retirees today are often living as many years in retirement as they were working.  If your retirement portfolio is only invested in bonds or other fixed income securities, you may find yourself in a risky position, unable to fend off inflation and maintain your retirement income needs.  Investing in equities in retirement is just as important as during your working years.  Equities help provide the growth and inflation protection needed to help your portfolio withstand years of income distributions. 

#2:  When I reach retirement, I no longer need to plan

Not only is it important to plan ‘for’ your retirement, you need to continue to plan ‘through’ your retirement.  Retirement shouldn’t be just a date on the calendar.  Retirement is the next phase of your life, which for many will last until your 80’s and 90’s.  Retirement presents its own set of challenges from managing health care costs to developing a tax efficient distribution strategy to planning for the unexpected.

#3:  Income distribution in retirement isn’t a concern

Through the years, there are have been many Rules of Thumb when it comes to income distribution.  Do you really want to rely on a Rule of Thumb for your income distribution strategy?  Designing and setting the stage for a tax efficient, systematic distribution strategy that can withstand market risk, sequence of return risk, longevity risk, and inflation risk is crucial.  Don’t leave your income distribution plan to chance.   If you do…you may run out of money sooner than you think.

#4:  My taxes in retirement will be low

Most pre-retirees are comfortable with their current income level and have grown accustomed to the lifestyle that goes with it.  The expectation and hope are that they can continue this lifestyle in retirement.  As plans are developed and retirement income needs are identified, if possible, retirement should be a continuation of that lifestyle.   No one wants to wake up on the first day of retirement and realize they have to spend 30%-40% less than usual.  If your retirement income mirrors your working income (or close to it), your taxable income may not change much either, which means neither will your tax bracket.   This will all depend on your sources of income and how they are taxed.  So don’t forget to factor tax planning into your retirement projections.

#5:  Medicare will pay for all my health care costs in retirement

Research shows that while Medicare will pay for some health care costs, it most likely won’t be sufficient to pay for it all.  According to a study by HealthView Services, a 65-year-old couple in good health will need $387,644 to pay for health-care costs during their retirement years.  The healthier you are, the more you’ll spend over your lifetime because of your increased life expectancy.  Don’t overlook putting money away in an HSA account if you can.  It’s a great way to put money aside for medical expenses in retirement.  Check out our previous article The Health Savings Account:  A Triple Threat, for more details. 

Securities and Advisory Services offered through The Strategic Financial Alliance, Inc. (SFA) – Member FINRA, SIPC. Advisory Services offered through Strategic Blueprint, LLC, a registered investment adviser.  SFA and Strategic Blueprint are affiliated through common ownership but otherwise unaffiliated with Keen & Pocock.  Certain Keen & Pocock professionals are also registered representatives and/or investment adviser representatives of SFA and Strategic Blueprint.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. Keen & Pocock or SFA do not provide tax or legal advice.

Published June 2, 2020