3 big retirement myths

November 8, 2004
By Walter Updegrave, MONEY magazine

NEW YORK (MONEY Magazine) - The traditional view of retirement -- quiet contemplation interrupted by the occasional brisk game of shuffleboard -- has given way to a version that can include anything from trekking the Himalayas to launching a post-career career.

But some of us are still mired in the past when it comes to planning for retirement.

Sure, we know that unlike previous generations we can't rely on generous Social Security benefits or fat corporate pensions. And we know double-digit investment returns that once promised to make up the difference are gone.

But few act on this wisdom - or consider that a life spent taking trips down the Snake River could cost more than your working life. And even those of us who do may believe certain fallacies or exaggerations that can distort your savings efforts or cause unnecessary anxiety.

To help set the record straight, here are three persistent myths that should be dispelled.

Retirement myth #1
You need $1 million or more to retire comfortably.

False.

Yes, it would be wonderful to accumulate a seven-figure nest egg. But for many of us that goal is unrealistic and unnecessary. Fact is, most Americans can easily call it quits with assets well below the $1 million mark. And if you don't build up as much as you had hoped, here are a variety of moves you can make to compensate.

If, for example, the value of your home has increased dramatically, you may be able to downsize to smaller digs and come away with a tidy profit (tax-free, provided the gain is $500,000 or less if you're married, $250,000 or less if single).

Not interested in selling the homestead? You can still convert your home's equity into tax-free monthly income by taking out a reverse mortgage. To see how much income you may qualify for, check out AARP's reverse mortgage loan calculator.

And there's always the option of relocating to an area with lower living costs. By clicking on Moving & Relocation in the "House & Home" section of the msn site, you can get a sense of how much more (or less) your income can buy in different cities around the country.

Retirement myth #2
You can't count on Social Security.

False.

Pretty much everyone agrees that our Social Security system faces daunting problems, the biggest being that we'll have fewer workers supporting each retiree as the boomers leave the labor force.

As a result of this demographic mismatch, the money flowing into Social Security's coffers will fall short of what's needed to fund retiree benefits in 14 years. At that point, the system will have to tap the Treasury bonds in the Social Security trust fund.

But the notion that the system is in such bad shape that future retirees might receive little or nothing is totally overblown. Even if the trust fund runs dry -- which it's now projected to do in 2042 -- there would be enough money coming in from payroll taxes to fund 73 percent of currently scheduled benefits.

Nonetheless, it's certainly possible that future retirees will see their benefits trimmed or postponed. That's what happened the last two times the system ran into serious trouble (in 1977 and 1983).

Social Security being the political hot button that it is, it's virtually impossible to predict what changes, if any, may occur. As a practical matter, it makes sense to assume that you'll get your currently scheduled Social Security benefits if you're within a couple of decades of leaving your job -- and to assume you'll get less (but not nothing) if your retirement is further off. (To get an estimate of what your benefits will be, click here.)

Retirement myth #3
You can save less if you plan to work in retirement.

False.

The concept of retirement as a time when you abruptly go from a life of work to no work has pretty much gone the way of big tailfins and beehive hairdos. When AARP surveyed 1,200 baby boomers last year, almost eight in 10 said that they expected to take a job after retiring.

But while working in retirement certainly can supplement your post-career income, not to mention keep you more socially engaged, it would be a mistake to make such earnings a core component of your retirement plan.

One reason is that moving in and out of the work force at will may be hard to pull off when you hit 70. The earnings that are so easy to plug into a retirement calculator now might never materialize.

Notre Dame economics professor Teresa Ghilarducci also questions whether working in retirement is going to be as fulfilling as many of today's pre-retirees believe. "Jobs for older workers generally don't pay as well as those for younger workers, and the raises aren't as good," she said.

So when forecasting your retirement income, keep projections for a paycheck on the modest side. Whatever you do, don't use potential future earnings as an excuse to save less. If you do, you may very well end up having to work during retirement whether you want to or not.

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