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The ProVise Advisor Team
RETIREMENT PLANNING ASSUMPTIONS AND MYTHS
Whenever one plans for the future, it is often based on myths
that one has heard from others that are taken as fact and/or
assumptions that they have made. The only assumption that is
guaranteed to come true is – none of the other assumptions is
likely to be correct. Thus, the retirement plan must be flexible
and updated as warranted.
The first assumption is how long will you live in retirement.
Assuming you and your spouse are both age 65 when you retire
the average joint life expectancy is approximately 24 years which
means one of you will likely live to age 89. This is an average.
For those with good genes, good health and access to good
health care providers, it is likely higher. In addition, when you
consider the possible advances in medical care during the next
several decades, the conservative approach is to assume living
to age 100.
What will be the rate of inflation? Statista.com calculates it at
2.87% for the past 40 years, but the last 10 years it has averaged
much less. What Baby Boomer does not remember the inflation
of the 70s. We tend to use 3% to be conservative.
You must create a budget. What are your expenses going to be
in retirement? How often will you plan on occasional expenses
like a new car, major repair to the home, etc.? Next, you have to
look at your fixed income sources like Social Security, pension(s),
annuities, etc. Are they inflation adjusted? Most people want to
maintain their lifestyle and think they need 100% of their salary.
Not so. If you have a $100,000 salary, then about 7.5% is going
to Social Security and Medicare taxes. Maybe you are saving
another $10,000 into the 401k. That means you need to replace
about $82,500 of spendable pre-tax income. How will you create
an income plan to make up the difference?
How much do you need to have in savings to supplement
About ProVise Management Group, LLC: ProVise is a financial planning and investment management firm registered with the Securities and Exchange
Commission (SEC) and has been in business since 1986. Our 15 professional advisors serve approximately 1100 clients in over 30 states. As of 12/31/2020
we were managing approximately $1.6 billion for our individual, corporate, not-for-profit and 401k retirement plans. Please visit our website at: provise.com.
Investment Advisory Services offered through ProVise Management Group, LLC. The information herein is general and educational in nature and should
not be considered legal or tax advice. Tax laws and regulations are complex and are subject to change.
90 TAMPA BAY MAGAZINE | MAY/JUNE 2021
your cash flow? According to a recent Fidelity survey, about
50% said 5 times their annual salary at retirement. In reality, a
minimum of 10-12 times is recommended. If you retire with a
salary of $100,000, then you need at least a million dollars. What
is your risk tolerance? This will shape your asset allocation in
stocks, bonds, real estate, CDs, etc. and significantly impact the
expected return? Capital market assumptions over the next ten
years are much lower than they have been historically with both
stocks and bonds priced very near record highs. What happens
if the first few years in retirement produces a negative return?
A popular myth is that healthcare, aka Medicare, is free. It is
true that Part A (hospital) is free, but Part B (doctors and testing)
along with Part D (drugs) are not. The cost is also based on
your income and could be as much as $20,000 annually with a
supplemental policy. Many people are turning to a Medicare
Advantage Plan (Part C) as a result. While many of these plans
come at no or little cost, you may be limited in the providers
you use.
Another urban legend is that you should take Social Security
as early as possible. Should you start at age 62 or wait until Full
Retirement Age (FRA)? Prior to FRA your benefit is reduced
for life and you are restricted in the amount of earned income
you can have until you reach FRA. Should you wait until age
70 since your benefit increases by about 8% every year between
FRA and age 70? Do you take your own benefit or 50% of your
spouse’s? What happens when a spouse dies?
With all of these assumptions, it is almost impossible for
anyone to create a retirement plan on their own with any degree
of real confidence. Take advantage of a complimentary meeting
with us in our Clearwater or Tampa office with one of our CFP®
professionals who provide advice at a fiduciary standard of care.