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Recognizing Retirement Planning Myths
America is an aging society, with more than 76 million “baby boomers” gradually approaching retirement. Today, at age 65, the average American life expectancy is 25 percent longer than it was in the 1930s, and health care professionals -- dentists certainly included, thanks to frequent medical exams and generally healthy lifestyles -- should easily meet or exceed that average. After a dentist drills into the last tooth, he or she can reasonably look forward to two or three decades of retirement.
As that final procedure approaches, many dentists have rosy misconceptions about how much income or assets they need to become financially independent and enjoy a comfortable retirement. Still others do not consider or plan for increasing medical costs as they and their dependents age, something that can rapidly deplete seemingly adequate resources. Pension and Social Security benefits are not as strong as they once were, so wise planning is more essential now than ever before. No dentist wants to be prematurely forced from practice because of poor or negligent health choices, but far too many leave financial independence after retirement to chance.
Still, even if you are taking steps to plan for retirement, it remains important not to base goals of financial independence on myths and misinformation; instead focus your retirement and financial independence planning upon solid facts. Be extremely wary if you ever start “believing” any of the following financial myths:
Myth: Inflation is under control and no longer needs to be considered in my retirement planning.
Fact: Inflation can be a silent killer and needs to be factored into any prudent retirement plan. Think of inflation as negative compound interest slowly eating away at your assets. For example, annual inflation of 5 percent over twenty years divides real income by a factor of 2.65; which means an income of $30,000 today would have a purchasing power of only $11,320 twenty years from now. This can easily make a comfortable income at age 60 woefully inadequate at age 80 as expenses climb while income remains fixed. Make sure your portfolio is designed to account for an increase in inflation after you retire.
Myth: Medicare will take care of my health insurance after retirement.
Fact: Typically, Medicare pays less than half of a retiree's medical bills, and you usually cannot start collecting it until age 65. Proper medical insurance planning is essential to alleviate worries about potentially crippling financial and psychological burdens once active employment ceases.
Myth: I will not need as much money during retirement as I do now.
Fact: This may be true if your lifestyle remains unchanged, since work-related costs like commuting and clothing likely will decrease, but just because you will be spending differently during retirement does not necessarily mean you will be spending less. The conventional rule of thumb postulates you will need approximately 70 to 90 percent of your pre-retirement income to maintain a lifestyle similar to what you currently enjoy.
Remember, an active lifestyle is not cheap. When you retire, you will have more free time for travel, leisure activities, hobbies and other things you might like to do, which may actually result in a larger post-retirement budget. If you intend to maintain an active lifestyle, make sure you've devised a way to fund it.
Myth: Placing assets in “safe” investment vehicles removes the need for me to closely monitor them.
Fact: All investments need to be watched. Additionally, the practice of putting all of your assets into extremely safe vehicles exposes you to the greatest long-term risk possible: The loss of purchasing power due to inflation. The loss of purchasing power can be a devastating risk to deal with because it happens slowly and many times goes unnoticed year to year. You may notice things seem to get a little tighter each year, but still you try to make it and by the time you realize you need to make major adjustments, it is often too late.
Myth: Taxation will not significantly alter my retirement plans.
Fact: Taxes can easily consume up to one-third of your investment returns. Many people underestimate how valuable tax-advantaged investments can be and do not plan accordingly. Again, many dentists are fortunate to have access to tax-deferred investments through their practices like pension and profit sharing plans, so they should make the most of the opportunity throughout their careers. These tax-deferred investment plans are most beneficial if you have at least a 10-year period to invest, and can be of enormous value over twenty years.
If taxable accounts are included in a financial plan, they can and should be actively tax-managed to gain the best possible long-term results.
Myth: I can afford to wait until a few years before my retirement to start planning.
Fact: It is impossible to start planning for your retirement too soon! Time is the most powerful wealth accumulation tool you have at your disposal. The sooner you start to accumulate assets and plan for your retirement years, the better -- and the less you will need to set aside each year in order to achieve the same objective.
In order to achieve your long-term financial objectives, you must have an active investment program. Your investment program needs to focus not only on retirement planning, but should also consider any other large financial objectives that require a large pool of resources, such as college tuitions or weddings. Planning for your financial independence will require some thought and soul-searching analysis to determine what is most important to you. For most people, this will require giving up some objectives in order to achieve others.
Myth: I can count on present conditions to continue indefinitely.
Fact: Equity returns and interest rates can and will change in the future. Many retirees are in dire straits today because they based their standard living comfort on a 7 percent return on their money-market fund or the greater than 17 percent annualized return produced by the Standard and Poor's 500 Index over the last 15 years. The best plan is to create a diversified investment portfolio that has components that behave differently in different economic conditions.
Myth: Planning for retirement requires a conservative investment strategy.
Fact: Being too cautious with your investments can be just as foolhardy as being too aggressive. The previous example of investors who depend too heavily on money-market funds in order to safeguard their principal is a case in point. Unfortunately, they achieve safety of principal at the expense of income. If you have a long-term need, like retirement, being too cautious will cause inflation to substantially erode your savings and spendable income over time.
Myth: Social Security will provide enough income for my retirement years.
Fact: Although increases in benefits have occurred and may continue to occur, most likely they will be less generous than in the past.
In addition, the current plans are to extend the age you must reach in order to receive full retirement benefits. Thus, it is becoming ever more important to accumulate your own funds in addition to whatever the government programs can provide.
When designing an investment plan for a client, I rarely consider their Social Security benefits in determining cash flow needs, instead looking at Social Security as a bonus that may or may not be available. Keep in mind, even if Social Security is around forever, it was designed as a supplemental benefit and not the foundation upon which a successful retirement can be built.
A financially comfortable retirement is a reflection of good investment decisions, just as a long and active retirement reflects a lifetime of healthy diet and exercise. As you think about some of the issues presented here, ask yourself if you are basing your own financial independence upon any of these myths. If so, it is time to take a serious look at your financial independence planning and get back on track. A lifetime of practicing dentistry should lead to retirement years that are lived and enjoyed to their fullest potential in the manner you wish -- not constrained by mistakes you made in previous years.
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