Retirement Planning Myths

January 3, 2023 | Anthony Conte, MSFS, CEPA, CFP®

Each years’ end gives all of us working stiffs a little push toward considering what it might be like to not ever work again. 

Yes, of course I’ve had too much eggnog at a holiday gathering or two, and on the ride home I roll down my window to freshen up with a little cool air and wonder to myself, “what if every day were a holiday?”  

It’s at this point that my designated driver usually asks what I’m mumbling about and tries to wind up my window with my arm still dangling out in the frigid air. 

Getting home safely from holiday parties is a function of either keeping the Uber app on your phone or enough teetotaling friends in your contacts for a reliable DD, but getting to a comfortable retirement isn’t nearly as fool-proof. 

Let’s take some time and parse through some retirement planning myths that could easily derail an otherwise well-intentioned retirement plan. 

Social Security Should Be Enough 

According to the Social Security Administration the average annual Social Security retirement benefit in early 2022 was about $19,370, and for an average 65 year old retiree this benefit covers only 37% of past earnings. This is not nearly enough for most retirees to live comfortably in retirement. 

Most retirees I have worked with would like to see 100% to 120% of their past income covered annually. So the idea that we might need only 70% of past income in retirement is clearly also a myth. 

That makes this one a two-fer.  

And have you heard that the financial underpinnings of the Social Security system itself aren’t nearly as stable as we had all once thought? 

Accordingly, the 2022 Social Security Trustees report finds itself a bit concerned with the near-imminent diminution of those benefits we all had considered ‘guaranteed’. According to that report, if Congress doesn’t get serious about shoring up its financial standing, then retirees will lose nearly 25% of their full benefits beginning in 2034.  

I will continue to tell anyone who might listen that expecting a reliable income in retirement from Social Security approximating what we had been promised might be a bit of wishful thinking. We would all do well to consider finding a way to fund our retirement without counting on the government to meet any meaningful portion of our expense needs. 

I’ll Need $1 million Saved For a Financially Stable Retirement 

Phooey, just phooey. 

Earlier in my career I’d heard this number bandied about quite a bit as if it was a reliable rule.  

Individuals who had spent the majority of their working lives earning over a quarter of a million dollars a year were so certain that they needn’t have more than $1 million saved for retirement that they had already begun saving only the necessary amount to meet this magical goal in 20 years.  

This isn’t to say that some individuals can’t stretch that money to last a full retirement. Taking 3.5% distributions from a $1 million portfolio provides a $35k gross income, but Traditional IRA and 401k distributions will be taxed as income leaving even less money to cover expenses.  

In this scenario, a family with a $175k net income must decrease expenses to ensure that social security retirement income, pensions, and income from other sources make up a roughly $140k annual shortfall. 

Spoiler Alert: You’d be lucky if Social Security retirement income generated even $50k for you in 2022, and pensions are about as rare as a sane tweet from Kanye West in 2022. 

Each person’s situation is different, though. 

Maybe that family makes up their income needs not just with a 3% to 4% spend from the $1 million portfolio but also relies on considerable rental income from a real estate portfolio to make up the rest.  

The bottom line is that no specific dollar-savings-goal is going to magically align with each person’s retirement income needs, and with 2022’s inflationary pressures that $1 million savings buys you less and less and less and… 

I’ll Be In a Lower Income Tax Bracket In Retirement 

Have you seen the federal deficit and debt? You know that someone somewhere is going to have to pay that down, right? 

Whether or not your legislators are willing to be honest with you, you are fortunate to have Uncle Tony here: your reliably candid bastion of truth and pragmatism.  

The bill will come due one day and unless someone in Washington figures out how to cut costs, then they will have to increase revenue. Where else would they get this revenue if not from taxpayers like us? 

Regardless of whether or not your income remains the same, increases, or even decreases in retirement, there is always the very real possibility that your annual tax consequence could worsen.  

The 3% Rule Really Works 

Admittedly, this myth was a bit of a trick. The rule is really called “The 4% Rule”. 

I know, totally unfair. 

What is widely known as the 4% rule, the idea that one could begin distributions annually at 4% of a portfolio’s value each year, increase it each year to account for inflationary pressures, and expect that the funds would last at least 30 years, has proven, at times, to be a relatively reliable rule for some investors. 

Dropping that 4% distribution rate to a more conservative 3% allows for an even more stable and reliable portfolio balance to continue producing future distributions. 

The good folks at Morningstar have revised the reliable distribution rate from time to time to account for fluctuations in market valuations. They recommended a 3.3% rate in late 2021 and then bumped the number back up to 3.8% a year later. The rationale behind the vacillation is that market valuations present opportunities for greater distribution rates, counterintuitively, when the markets are devalued as those times present the greatest opportunity for portfolio growth in the future. 

With annual distributions at 4% and starting any year from 1926 through 1993, a portfolio would have supported those distributions for at least 28 years given market performance over those periods. 

So Many Myths 

We have only been able to cover a handful of the most prevalent retirement planning myths here, but rest assured, many more should be considered and debunked. But I will leave that your trusted advisors…or you can always call your Uncle Tony. 

Read the article in Central Penn Business Journal here.

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker/dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Conte Wealth Advisors, Central Penn Business Journal, and Cambridge are not affiliated.