Don't be befuddled by retirement maze
CHICAGO — No matter how many years you are from calling it quits, it's essential to have some kind of plan in mind for financing retirement.
The days of counting on Uncle Sam and a company pension to carry you through old age are long gone. We're living increasingly in a “yoyo” economy — short for “you're on your own.”
But it's easy to get fooled by some of the many myths about retirement planning that exist on the Internet or in misguided advice passed along by well-meaning family or friends. Heeding bad tips could cost you when you can least afford it.
Here are some of the most common myths about retirement planning, and the truth behind them.
MYTH 1: It's OK to postpone saving for retirement until other needs are taken care of.
Don't fall into the trap of thinking it'll be easier to save for retirement in just a few more years. There are competing, expensive needs no matter how old you are — from college loans, wedding expenses to home, kids and their college. Every year you delay means you'll need to save more in order to get on track.
“The best time to start saving for retirement is when you were 22 years old,” says Stuart Ritter, a certified financial planner with T. Rowe Price in Baltimore. “The second-best time is now.”
MYTH 2: Medicare will take care of almost all your health care needs.
Medicare covers about half of all health care costs for those enrolled in the program. For the rest, yes, you're on your own. That means you'll be on the hook for out-of-pocket costs for uncovered services such as long-term health care as well as dental, hearing and eye care, along with supplemental insurance costs.
A 65-year-old couple retiring this year is estimated to need about $240,000 to cover medical expenses throughout retirement, according to a study of retiree health care costs by Fidelity Investments.
MYTH 3: You'll need far less income in retirement to maintain the same standard of living.
This may be true in some cases, but it could be a life-changing mistake to count on it. Surveys of retirees have found that many spend as much or more in the early years of retirement than before they retired.
You may not need 100 percent of your earlier income. But take some time to analyze what you expect to spend in retirement in order to lessen any anxiety.
MYTH 4: You can claim Social Security early and still get full benefits later.
Applying for benefits as soon as eligibility begins at 62 will entitle you to monthly checks immediately. But when you claim early, your benefits will be 25 percent less than if you had waited until full retirement age and 75 percent to 80 percent less than if you'd held off until 70. That remains the biggest misunderstanding among people using the AARP's Social Security Q&A tool, http://www.aarp.org/ssqa .
“This myth is not only so wrong but also dangerous,” says Jean Setzfand, AARP vice president for financial security. “When consumers claim their Social Security benefits, they lock in those benefits for life.”
Claiming early may be the right move for people with serious medical issues or a family history that suggests they're not likely to live to a ripe old age. But it's best to make deliberate calculations and see if you can wait longer in order to collect more.
MYTH 5: You should rely heavily on bonds rather than stocks as you get older.
That common advice made sense when retirements were shorter and inflation didn't have as much time to erode savings. Planning for a 30-year retirement changes the thinking. So does the fact that the outlook for Treasury bonds isn't so bright, with the government loaded with debt.