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Myth: In Retirement, I’ll Be Able To Relax and Not Worry About Saving

After a lifetime of squirreling away money and delaying gratification, many retirees still fret about their spending. In some cases, they worry more as retirees than they did when they were in the workforce.

When people work, they get a paycheck as long as they show up on time and do a decent job. Usually, that feels like a dynamic they can control. Most of the volatility of financial markets don’t bother workers much because their paychecks keep coming.

But in retirement, economic, political and financial market gyrations are suddenly a great cause of anxiety. Good advisors must offer perspective to retirees to keep them from worrying themselves and making bad decisions.

Moreover, retirees are forced to make puzzling and distressing decisions: Which accounts do they pull from first? How long will they live? Will their pension remain solvent? Will Social Security be altered? Will they need significant health care or long-term care? Will family members need some financial help?

Retirement well managed can lower a person’s stress, but it takes planning and perspective, and an advisor must offer a different skill set than he or she does in the investment years leading up to retirement.

Myth: My Kids Will Be Off ‘The Payroll’

Maybe, maybe not. Ideally, our children blossom into adults and sustain themselves without our financial support. But unfortunately, they have the same problem the rest of us do: We are all human.

They can lose their jobs, for instance. They can get sick or injured. They can battle addictions. They can get ripped off or embroiled in legal disputes. They might simply struggle to stay financially independent. The list of possible problems is endless.

Clients can never say for sure what will happen once the nest empties. Will they really say no when one of their kids needs money for a beloved grandchild’s medical care? Or refuse to help pay for a lawyer to get a son and/or daughter through a divorce? Probably not, so we need to be prepared to help them assess the long-term ramifications of helping out.

Myth: You Don’t Need Life Insurance, So You Can Drop It

One of the main reasons people have life insurance is to replace their lost wages if they die early. That means when they retire, they are less inclined to keep the policies. Often, they simply drop and surrender the policies for any cash value in them. They view the insurance suddenly as an expense, not an asset.

That could be a mistake.

True, they may no longer need to replace lost wages after they retire, but many widows find their lifestyles are hampered when their retired spouses die. The total Social Security payable to the household decreases when either spouse goes and there may be a reduction in a pension payout. Plus, survivors’ tax brackets compress when they start filing as single taxpayers, and that stresses their portfolios.

Though many retirees will not “need” life insurance, they still shouldn’t rush to drop their policies. There is an adage that no beneficiary ever thought the insured had too much life insurance—and dying is a matter of “when” not “if.” None of us knows whether the proverbial bus is around the next corner, and at the least we should get thorough physical exams before making rash decisions about dropping our insurance policies. Heaven forbid a policyholder has cancer or another condition that could cut life short.

Myth: I Must Convert To A Roth IRA

Clients rightly worry about required minimum distributions that could force them into higher tax brackets at age 70 1/2. Nobody likes to be forced into doing anything, especially paying taxes, but too few people ever seem to do the math when it comes to Roths. With the recharacterization of conversions no longer allowed, that math has become even more important.

The first-year required minimum distribution is roughly 3.7% of an IRA when a client hits age 70 1/2. It rises to only about 5% by the time the client is 80. Clients with smaller or conservatively positioned retirement accounts often don’t experience the jump in taxes they feared.

The obsession with the onset of distributions is a bit shortsighted. The more compelling reason to convert would be that a client is confident his or her current tax bracket is lower now than it would be for monies in the future.

Myth: I Shouldn’t Take Money From Retirement Accounts Before 70½ Unless I Need It

There’s also a danger in ignoring the effects of required minimum distributions rather than fearing them. It’s a common scenario that an early retiree who loves paying little in taxes through his 60s reaches 70 1/2 with a large retirement balance. The resulting RMD kicks him into a higher bracket. When he passes, it will be even worse on his surviving spouse because of the compressed tax brackets single filers face. Ouch.

We have had plenty of tough times yet we keep making progress. It hasn’t been fun and stressful at times, but we continue to move on. To abandon sound long-term financial plans designed to overcome short-term issues out of a fear over short-term events is not a good strategy.

It takes some time and a lot of empathy, but taking the time to work through a good financial planning process shifts the focus to how to be more resilient and away from requiring good guesses about what will happen next.     

Post Author: Lorrie Toillion, CFP®

Accounting Specialist, Tax Assistant, and Client On-Boarding Associate.