10 Retirement Myths – Part 2
Retirement Myth #6: You need the same amount of income, indexed for life.
I’m sure you can come up with a list of things that don’t fit the “set it and forget it” philosophy. Set the cruise control and forget it. Set the room temperature and forget it. Invest in a certain investment that has a particular risk associated with it and forget it. You need to make adjustments as the situation changes and as your needs and priorities change. Retirement income planning works like that.
You won’t need that initial level of retirement income, indexed for the rest of your life.
Retirement isn’t one long vacation. It isn’t one period in your life. It represents the longest set of phases in your life. Each phase will have different needs for cash flow. You’ll need more money in your early, active years. You then settle down to a more normal retirement where expenses drop. Then late in life, poor health, the loss of your spouse or partner, losing your driver’s license, and your attitude and behavior will cause you to spend even less money. Yes, you may require money for long term care needs, but hopefully, you planned for that before your retirement so that those needs aren’t coming out of your regular cash flow late in life. You should review how much money you need and the most efficient way of getting it every year, certainly as you experience life-changing events.
Set up an investment and income stream that is flexible and adaptable to changing circumstances. Stress test the plans, strategies, and components to make sure they continue to do the job they were designed to do. Life changes and your needs for income will change with them.
Some rules of thumb and long-held assumptions may work well while you are saving for retirement. Holding on to them when you are spending those savings during retirement, may become toxic to your financial health. The myth is that you’ll have enough money to last through retirement as long as the average rate of return matches your plan.
Retirement Myth #7: Your money will last as long as the average rate of return is good.
Averages can be very misleading when applied to rates of return during decumulation or spending periods. You need to pay attention to the pattern of returns that make up the average rates over time. The patterns can dramatically impact the size of your assets when you are withdrawing money to provide yourself an income to meet expenses, especially in the early years of retirement. You eat into your retirement nest egg when: you need to withdraw money and the markets are down, or what you take out is more than what your investment is earning.
It becomes very difficult to rebuild your savings pool because you have to make up for the lower rate of return in a given year and account for the money you spent that is no longer invested. Negative rates of return in the early years of spending can dramatically reduce how much money you will have left 10, 15, or 20 years down the road. This is the case even if the long term average rate of return matches your plan. You see, it’s not just about average rates of return; it’s about the sequence of returns that make up the average. Starting with a low or negative return has the potential to permanently upset your plans and how long your money will last.
At the risk of sounding nitpicky, governments don’t pay for anything. Working Canadians do. Taxpayers do. Taxes are directed to certain areas of need. Growing needs and rising costs mean that there isn’t enough public money to go around. That reality is hitting retirees and will hit them harder as time goes on.
Retirement Myth #8: The government will take care of medical expenses
We hear a lot about cutbacks on services, whether it’s in a hospital or government health care. All expenses are not covered. Many caregivers as well as the sick and disabled learn that the hard way. You’re on the hook for those extras, like medications, home care, and treatments that can make you well, keep you fit and preserve some dignity, control, and independence.
Our rapidly aging society is backing governments into a corner where they are making tough decisions on health care. It seems that there are already too many older people to care for with existing programs and funding.
1 Absolute cost have been increasing and services have been cut back (think about provincial health care coverage alone and lack of funding for services for elders noted above).
2 Get used to it. You are going to have to channel more income into paying for uncovered services or eat into your long-term savings to take care of yourself and your aging family. Our society is moving quickly from child care issues to eldercare issues. And the latter issue is much more expensive and long-lasting. The movement now is pushing care out into the community. That sounds good and has some merits. But long-term care is not free. Much of it is provided by the family. It’s voluntary. It means sacrifices of energy, time out of the workforce, and hits to the retirement savings plans of caregivers. The government is not picking up the tab.
Things often go wrong or take an unexpected turn even though you carefully planned what you were going to do. Robert Burns’ famous line basically said that the best-laid plans of mice and men often go astray. That extends to intentions of staying on the job or finding paid work later in life.
Retirement Myth #9: Go back to work when there are not enough retirement savings
I can deal with a shortfall in retirement savings by working longer or taking up some part-time work.
Recent studies have found that almost half of retirees left the workforce earlier than planned. Downsizing, layoffs, and negative working conditions were some of the reasons. People ages 55 plus spend an average of more than 27 weeks or more on unemployment. That’s almost 5 months longer than younger people looking for jobs. (Source: The Long Road Back: Struggling to Find Work after Unemployment, 2015). The 2019 RBC Myths & Retirement poll found that among working Canadians ages 50+, half plan to work in retirement but only 11% of retirees returned to work full time or part-time.
The biggest reasons for leaving the workforce early were health-related; either the workers or someone in the family. Working longer is not an option you can count on because staying on the job or getting another job is not a given. Almost two-thirds of retired Canadians said they had less than a year to plan and adjust for what could be 30-40 years of retirement. 16% had no advance notice at all that they would be “retiring”. (source: RBC Retirement Myths & Realities poll 2019)
Do your plans include provisions for leaving the workforce early? Do they factor in what could now be a long retirement? If you leave the workforce because of health reasons, do your plans factor in what could also be a more expensive retirement?
The next retirement myth is an example of an inter-generational issue. It also goes back to the issue of when to start making and funding plans for retirement.
Retirement myth #10: I’m too young for critical illness or long term care coverage
I’m too young to start paying for critical illness or long-term care.
A 2013 Retirement Myths and Realities Poll found that 42% of younger boomers said being a caregiver was something they had already done, were doing, or expected to do some time. Where does the money come from for out of pocket expenses, time lost from the job, and a caregiver’s need for retirement savings?
One of the smart things you can do is buy a critical illness policy while you are still young, healthy, and working. You need reasonably good health to qualify. Time has a way of building a family health history full of issues that can drive up costs or prevent you from getting coverage. When should you look at long term care policies? Ideally, in your 50s or perhaps even earlier, before costs get prohibitive. Your retirement plans and income streams can be destroyed by overlooking healthcare costs. Those costs can be to provide for your own well-being or that of aging parents. Yes, buy plans for yourselves. Consider buying or sharing the costs for parents too. They could do the same for you depending on who has the greatest available cash flow. After all, you will probably spend more of your life taking care of parents than raising your children. What will that do to your retirement nest egg? There is a difference between caring and providing care. When do you think of all the costs involved in both options, emotional, physical, and financial; which cost can you best handle?