Busting Some Retirement Myths

June 16, 2011
Jeff Brown, MD

There are a number of retirement myths that people take as fact. But it's worthwhile to explore them and see how much truth there is.

There are several reasons why exploring retirement myths are important. The first is that people, including doctors, tend not to do their homework on the subject until later than is ideal. So stories about "old Dr. Jones" who failed in some financial way gain popularity, and the more financially lurid they are, the better. Voyeurism and "better you than me" aside, some doctors just don't have accurate information or the right perspective for analysis when the stories start in the hospital cafeteria. And don't the stories get better after being told and retold a few times?

The second reason why it pays to look at "myths" — read; what I heard a long time ago — is that the retirement landscape is changing rapidly and promises to continue doing so, near- to mid-term. Just look at how the recent Debt Recession has kept a lot of doctors working past their "best if served by" date. The sagging markets, underwater houses — where owners owe more than the houses are worth — sliding commercial investments and the Bernie Madoffs of the world — I know a doctor who had his entire net worth evaporate with Madoff — all put a freeze on many retirement-age doctors over the last three years.

Which leads to myth number one: social security is going under. Well, by 2037 anyhow. If you are 50 years old or over I wouldn't worry about you being affected. For younger doctors, worst-case scenario, you can probably expect to see the retirement age qualifier creep to 70 and a means test comes into play. The upper limit of income for social security/FICA deductions will also no doubt move upward. Younger doctors will be affected, but the program is here to stay. And although the average monthly stipend is just $1,072, doctors probably qualify for double that based upon their earnings history.

The second myth, which we doctors know all too well, is that Medicare covers all health care related expenses. The Associated Press reported on May 29, 2011 that in 2009, the average American paid $4,846 out-of-pocket for medical expenses. Medicare’s Medigap policies and long-term care insurances are becoming necessities and will get more expensive over time.

Knowing that about Medicare gives us just one reason why myth number three, you'll spend less in retirement, is so wrong. Experience has shown that as the Baby Boomers are coming into their own, travel and new hobbies, in addition to rising out-of-pocket health care costs, are giving the heave-ho to the old concept of planning for 80% of your working earnings being enough. Most financial planners are now advising their clients to shoot for 100% if they have the time and the option.

.

One reason to do this exercise is that looking ahead, in my neck of the woods at least, bare-bones assisted living starts at $3,000 per month, per person, if you can find it. And at today’s prices it usually goes from $5,000 to $10,000.

Myth number five is a little more uncertain. The idea is that paying off your mortgage to live rent free in your home during retirement is important. Well, maybe, depending on a number of things. How much equity does that mean you have tied up in your paid-off home? That equity can be an important chunk of your net worth to live off of, especially if you plan to cash out and move to a cheaper area. Even after the real estate bust, many retirement age doctors still have substantial equity in their homes.

Do the math to see if you can afford to plan on staying where you are, downsizing or cashing out in favor of a rental. Some people use the equity as an emergency fund if they have a line of credit on their homes. For some, the mortgage deduction is useful. It's a comforting idea to have paid off your mortgage, but fewer doctors will find that it makes economic sense once they apply their plans, assets and needs to the numbers.

The last myth — number six — is that you will likely be in a lower income bracket in retirement and therefore likely to face lower taxes. Not only are both things unlikely, but no one wants to be in a lower bracket — we want to have more income if we can get it! And you don't have to be Nostradamus to look at the national debt, the annual deficit and rising national awareness of both to realize we will be forced to see lower entitlements and increased taxes in the future.

As George Orwell said "When myths are believed in, they tend to become true." So, take responsibility, plan better, spend less and save more. I know; I don't like it either.

Myth number four is that retirees should convert their liquid assets into bonds, because they are reliable and take no tending. That’s true enough for the most part, except for two things. First of all, interest rates are at a near historic low, requiring a much larger net worth to get by on. Secondly, there is no provision made for inflation, which is certain to cycle back over our likely extended retirement lives. And inflation will reduce the value of your nest egg faster than you can believe. Even at a measly 3%, your buying power will halve in 25 years, which is a time period that a newly minted retiree should plan on having money for. One rule of thumb is that you should keep equities to hedge inflation at about a percentage of your total liquid assets equal to your age subtracted from 100%. The increasing difference will be the bond portion. It's a starting point