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Money Talks

By Dr. Gregg Dimkoff
Professor, Grand Valley State University
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Deciding to end one’s career and enter a life of leisure and enjoyment is one of the most important decisions a worker will make. With the economy recovering and the stock market indexes up sharply from their March 2009 lows, many older workers are again contemplating retirement. Here are a few myths about retirement and retirement planning:

Myth #1: Spending will fall significantly upon retirement
Yes, some expenses — commuting, parking and clothing for example — will fall. Other expenses, however, often rise. Retirees like to use their leisure time traveling, they eat at restaurants more often, many spend more money on their children and grandchildren, and medical expenses increase significantly. Research shows that retired people do cut back on their spending, but usually not until around age 80. By then, physically moving around usually becomes difficult. Spending drops to about one-half of what it had been in the early retirement years.

Myth #2: You will sell your house and move into a smaller one
The intent is to use the price difference to help fund retirement expenses. In theory, that’s exactly what many retirees should do. But the reality is that, the older people become, the more they want to stay in their homes. I often ask my financial advisor friends whether they know of a single instance of a client downsizing their house to help fund retirement years. Most don’t.

Myth #3: Social Security will go bankrupt
Though it’s common to joke about whether Social Security will be around to pay retirement benefits, in fact it will be one of the last benefits to disappear. Sure, it’s in serious trouble, but we’ve fixed it in the past and will do so in the future. With more than one-third of the U.S. population either retired or consisting of Baby Boomers thinking about doing so, no sane politician would dare vote to do away with the retirement benefit.

Myth #4: You can retire early
Give up that idea. A relevant question is whether you ever can retire. Our spending habits and feelings of entitlement are quite different from those of previous generations. Already, many retirees struggle mightily to live within their budgets, unwilling to give up dining at expensive restaurants and expensive vacations even as their savings peter out. Increases in life expectancies present a problem prior generations didn’t face. A worker today who retires at age 62 may live past age 90, perhaps spending more years in retirement than at work. About the only workers who can retire early are those with modest needs, those with great wealth and those with great pensions and retiree healthcare plans. One needs only to look at the damage those legacy costs wreaked on Chrysler and GM to see how secure pensions and retiree healthcare plans are.

Myth #5: You can safely withdraw 8-10 percent of your retirement funds each year
Many financial advisors use Monte Carlo simulation software to analyze whether an individual’s investment portfolio is large enough to withstand the inescapable ups and downs of the financial markets. The software looks at thousands of scenarios based on different possible values of inflation, tax rates, interest rates and stock returns. In general, the software shows that a well-diversified retiree won’t run out of money as long as withdrawals don’t exceed 4-5 percent per year.

Myth #6: Retirement will be fun and enjoyable, much better than working.
That’s certainly true for many people, but not for most. When people are asked why they want to retire, they often give nonsense answers like “I’m burned out,” or “I don’t like working here,” or “I’m tired of the rat race.” These aren’t good answers. A good answer is, “I have a financial plan that allows me to retire, and I want to spend more time with my grandchildren, or in my garden, or working on my bucket list.” Many, many retirees are bored to death, especially men. Most men fill their social needs at work where their friends are. Upon retiring, they lose their incomes, lose their friends and lose their social connections. The boredom and the fear of running out of money forces many of them back to work, usually part-time, and usually at a fraction of the wage they had been earning. But it beats staying home trying to make sense out of daytime television.

There can be no doubt that the decision to retire is an extremely important one. Understanding the issues usually leads to better decisions.

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