False Statements in Retirement Planning

By John Brummitt

We have all heard them: “You can always keep working if you need more in retirement.” “We will have our Social Security.” And, of course, one of my favorites is, “You only need 70-80% of your income in retirement.” All of these are false (or at best misleading) statements.

For some reason, even though we have not prepared for this 20- to 30-year stage in our lives, we act as though we will still be able to maintain our current standard of living…or at least close to it. Let’s take a deeper look at each one of these statements, and consider the truth about them.

“You can always keep working if you need more in retirement.”

In a recent study by the Employee Benefit Research Institute on Retirement Confidence, 67% of workers plan to continue working some type of paying job after retirement. Because life expectancy has increased, and healthcare has advanced, people are living longer. This makes continuing to work a possibility. However, 81% of those surveyed said they would probably need to work to make ends meet, and 74% would need to work to have health insurance.

Continuing to work is a very real need for many people facing retirement. The problem is no one is guaranteed the ability or opportunity to continue working. Sometimes, health concerns may eliminate your options and prevent you from working. Companies often downsize or force retirement, and few companies are looking to hire new employees who are approaching (or beyond) retirement age.

“We will have our Social Security.”

Two major misconceptions are common about Social Security: 1) that Social Security pays enough to replace your working income, and 2) Social Security will be gone by the time you retire. The truth is closer to the middle. Social Security is a valuable resource for the retirement years, but it will not cover all your expenses in retirement.

The Social Security Administration projects it can maintain the current structure until 2036, but in 2037, benefits may be reduced 22% to keep the program active. They will continue to be reduced unless changes are made to the current structure. Even if you receive a Social Security benefits projection, you may still receive 22% less Social Security benefits. If you knew that in 25 years you were going to lose 22% of your annual income, what preparations would you make to handle the loss of income? You should begin making those adjustments!

“You only need 70-80% of your income in retirement.”

If you currently save 20 to 30% of your income, yes, you can live off of 70-80% of your income. Unfortunately, most people do not save anywhere near this amount. The typical retirement contribution is around $100 per month. At $100 per month, your annual income would have to be $6,000 per year for you to save 20%. If you make $40,000 per year, $100 per month is saving 3%.

The other problem with this statement is that it leaves out another key factor about retirement income. It takes a long time to save enough in a retirement account to provide 70% of your current income. If you make $40,000, then 70% would put you at $28,000 a year in retirement. That means you need at least $435,000 in retirement funds to receive $28,000 per year for 30 years, guaranteed at 5% interest per year.

Don’t get caught up in these misleading statements without actually considering the “real” numbers needed to ensure your future. When it comes to retirement planning and your financial future, know the actual numbers you need to shoot for in planning. The sooner you establish a plan, the better off you will be.

About the Writer: John Brummitt became director of the Board of Retirement in January. He graduated in 2011 with an MBA from Tennessee Tech University. A 2004 graduate of Welch College, he has been with the Board of Retirement since the spring of 2006.