Seven Things NOT to Assume About Retirement Planning

Seven Things NOT to Assume About Retirement Planning

  1. You?ll retire at age 65 and live to age 80. Forced early retirement is a trend that won't go away soon. Aim to retire at age 65, but calculate that you might have to retire at 58 and calculate that you?ll need enough income in retirement to last you until at least age 90. Also, be mindful of the fact that one of Americans? worst fears is that they will outlive their resources. It's far better to have too much than too little.
  2. You have to preserve principal. Sure, it's a time-honored adage to never touch your principal. But consider the reality of life today (and the strategy under assumption #6): It's very difficult to save enough money to both generate a stream of income in retirement and leave an inheritance legacy for your children. It's okay that people may want to leave a legacy, but they shouldn't do it at the expense of their lifestyle in retirement. (Note: Insurance may help you meet your legacy objectives.)
  3. Your company's defined-benefit pension plan will match inflation. It may not, and don't assume that your pension and Social Security will be adequate to meet your goals. Use cash flow planning instead.
  4. Medical insurance and expenses won't be an issue in retirement. Instead, remember that the cost of medical care may continue to outpace the general rate of inflation and that longer lives may mean higher medical costs, which can increase your out-of-pocket insurance expenses. The possibility that you or your spouse will require long-term care only adds to potential medical expenses.
  5. "Safe" Investments Ensure Principal Protection. Although CDs are generally FDIC insured, if the after-tax interest rate on that CD does not beat inflation, you will be worse off financially in one year than you are today. Inflation erosion is a serious topic!
  6. You can time the market. Plenty of money managers claim to move in and out of the market and generate spectacular gains. Ignore them. Instead develop an asset-allocation plan designed for your own investment objectives, time horizon, and risk tolerance. Match your cash flow needs with your assets. If you will need the money in the next 5 or so years, your investments should be highly stable and liquid. If you?ll need to money in years 5-12, you must seek to beat inflation but yet have a fairly stable principle value. If you won't need the money for at least 13 or so years, you need growth potential; the other two time horizons bought you time to seek growth.
  7. Your current portfolio will appreciate so much that you can keep your annual savings rate low. Your returns may not grow as you expect. To safeguard your retirement, save now as much as you reasonably can.
These are just a few of the common misconceptions people have about retirement planning. To ensure a financial secure retirement, careful tax and investment planning must take place and consultation with a professional may be necessary.

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