Financial Planning for Retirement

Financial planning for retirement is a popular topic, but if you fail to address these two misconceptions, then it can backfire. We’ve all heard about the “new retirement”, the mix of work and play that many of us assume we will have in our lives one day. We do not expect “retirement” to be all leisure. While this is becoming a cultural assumption among baby boomers, it is interesting to see that certain financial assumptions haven’t really changed with the times.

In particular, when financial planning for retirement, there are two financial misconceptions that baby boomers can fall prey to – assumptions that could prove financially harmful for their future.

#1) Assuming retirement will last 10-15 years. Previous generations of Americans planned for retirements anticipated to last only 10-15 years. Today, both men and women who reach 65 can anticipate around 20 additional years of life. It’s important to note that this is just an average; a quarter of people reaching 65 will live beyond 90 and ten percent will live another five years or more.

However, some of us may live much longer. The population of centenarians in the U.S. is growing – the Census Bureau counted 53,364 folks 100 years or older in 2010 and showed a steady 5.8 percent rise in centenarians since the previous count in 2000. It also notes that between 1980 and 2010 centenarians experienced a population boom, with a 65.8% rise in population, in comparison to 36.3% overall.

If you’re reading this article, chances are you might be wealthy or at least “affluent.” And if you are, you likely have good health insurance and access to excellent health care. You may be poised to live longer because of these two factors. Given the landmark health care reforms of the Obama administration, we could see another boost in overall American longevity in the generation ahead.

Here’s the bottom line: every year, the possibility is increasing that your retirement could last 20 or 30 years … or longer. So assuming you’ll only need 10 or 15 years worth of retirement money could be a big mistake.

Many people don’t realize how much retirement money they may need. There is a relationship between Misconception #1 and Misconception #2 …

#2) Assuming too little risk. Our appetite for risk declines as we get older, and rightfully so. Yet there may be a danger in becoming too risk-averse.

Holding onto your retirement money is certainly important; so is your retirement income and quality of life. There are three financial issues that can affect your quality of life and/or income over time: taxes, health care costs and inflation. Over time, even 3-4% inflation gradually saps your purchasing power. Your dollar buys less and less.

Here’s a hypothetical challenge for you: for the rest of this year, you have to live on the income you earned in 1999. Could you manage that?

This is an extreme example, but that’s what can happen if your income doesn’t keep up with inflation – essentially, you end up living on yesterday’s money.

Taxes may be higher in the years ahead. So tax reduction and tax-advantaged investing have taken on even more importance whether you are 20, 40 or 60. Health care costs are climbing – 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 – growth investing is extremely important.

No one wants the “Rip Van Winkle” experience in retirement. No one should “wake up” 20 years from now only to find that the comfort of yesterday is gone. Retirees who retreat from growth investing may risk having this experience.

How are you envisioning retirement right now? Has your vision of retirement changed? Is retiring becoming more and more of a priority? Are you retired and looking to improve your finances? Regardless of where you’re at, it is vital to avoid the common misconceptions and proceed with clarity.

Remember, financial planning for retirement is a process, not just a single activity. Make sure you address these two misconceptions so your retirement is everything you’ve dreamed it to be.