While the idea of retirement has changed, certain financial assumptions havenâ€™t. Weâ€™ve all heard about the â€śnew retirement,â€ť a mix of work and play with the modern retiree leading an active lifestyle. While this is becoming a cultural assumption among baby boomers, it is interesting to see that certain financial assumptions havenâ€™t really changed with the times. In particular, there are two financial misconceptions that we can fall prey to â€“ assumptions that could prove financially harmful to your future.
Misconception #1 – Assuming retirement will last 10-15 years. Historically, retirement has lasted about 10-15 years for most Americans. The key word here is â€śhistoricallyâ€ť. When Social Security was created in 1933, the average American could anticipate living to age 61. By 2005, life expectancy for the average American had increased to 78.1
In 2010, the American Academy of Actuaries says that the average 65-year-old American male can expect to live to 84Â˝, with a 30% chance of living past 90. The average 65-year-old American female has an average life expectancy of 87, with a 40% chance of living past 90.2 With all the advancements in medicine, we could see this boost in overall American longevity to continue. The bottom line: every year, the possibility is increasing that your retirement could last 20 or 30 yearsâ€”or longer. So assuming youâ€™ll only need 10 or 15 years worth of retirement money could be a big mistake and most donâ€™t realize how much retirement money they may need. This leads us to the next big misconception:
Misconception #2 – Assuming too little risk. Our appetite for risk declines as we get older, and rightfully so. Yet there may be unintended consequences of becoming too risk-averse. Holding onto your retirement money is certainly important, but so is your retirement income and quality of life. In addition to longevity risk, three major financial issues that can affect your retirement over time are taxes, health care costs and inflation.
Will the minimal inflation weâ€™ve seen at the start of the 2010s continue for years to come? Donâ€™t count on it. Over the last few decades, we have had moderate inflation (but sometimes worse, think late 70â€™s and early 80â€™s).Â Over time, even 3-4% inflation gradually saps your purchasing power. Your dollar buys less and less. Taxes will likely be higher in the coming decade. So whether you are 20, 40 or 60, tax reduction and tax-advantaged investing will take on even more importance. Health care costs are climbing â€“ we need to be prepared financially for the cost of acute, chronic and long-term care.
As you retire, you may assume that an extremely conservative approach to investing is mandatory. But given how long we may live – and how long retirement may last â€“ some growth investing could be an important consideration in an overall income strategy.
1. nytimes.com, Week in Review, 4-27-2008
2. usatoday.com, Money, 4-30-2010
Damien helps individuals invest and manage risk. He is a Certified Financial Plannerâ„˘ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFPÂ® and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance.Â Your comments are welcome.Â Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.