Here are some commonly held assumptions—suppositions, which may or may not prove true for you, depending on your financial and lifestyle circumstances.
1. You should take Social Security as late as possible. Generally speaking, this is a smart move. If you were born in the years from 1943-1954, your monthly benefit will be 25 percent smaller if you claim Social Security at 62 instead of your full retirement age of 66. If you wait until 70 to take Social Security, your monthly benefit will be 32 percent larger than if you had taken it at 66.1
So, why would anyone apply for Social Security benefits in their early 60s? The fact is some seniors really need the income now. Some have health issues or the prospect of hereditary diseases influencing their choice. Single retirees don’t have a second, spousal income to count on, and that is another factor in the decision.
2. You’ll probably live 15 to 20 years after you retire. You may live much longer, especially if you are a woman. According to the Census Bureau, the population of Americans 100 or older grew 65.8 percent between 1980 and 2010, and 82.8 percent of centenarians were women in 2010. The real eye-opener—in 2010, slightly more than a third of America’s centenarians lived alone in their own homes. Had their retirement expenses lessened with time? Doubtful, to say the least.2
3. You should step back from growth investing as you get older. As many investors age, they shift portfolio assets into investment vehicles offering less risk than stocks and stock funds. This is a well-regarded, long-established tenet of asset allocation. Does it apply for everyone? No. Some retirees may need to invest for growth well into their 60s or 70s because their retirement savings are meager. There are retirement planners who actually favor aggressive growth investing for life, arguing the rewards outweigh the risks at any age.
4. Going Roth is a no-brainer. Not necessarily. If you are mulling a Roth IRA or Roth 401(k) conversion, the big question is whether the tax savings in the end will be worth the tax you will pay on the conversion today. The younger you are—roughly speaking—the greater the possibility the answer will be yes, as your highest-earning years are likely in the future. The conversion may not be worth it at all if you are older and at or near your peak earning potential.
5. A lump sum payout represents a good deal. Some corporations are offering current and/or former workers a choice of receiving pension plan assets in a lump sum payout instead of periodic payments. They aren’t doing this out of generosity. They are doing it because actuaries have advised them to lessen their retirement obligations to loyal employees. For many pension plan participants, electing not to take the lump sum and sticking with the lifelong periodic payments may make more sense in the long run. The question is can the retiree invest the lump sum in such a way that might produce more money over the long run, or not? The lump sum payout does offer liquidity and flexibility, which the periodic payments don’t, but there are few things as economically reassuring as predictable, recurring retirement income. Longevity is another factor in this decision.
Your retirement plan should be created and periodically revised with an understanding of the unique circumstances of your life and your unique financial objectives. There is no such thing as generic retirement planning because none of us will have generic retirements.
John P. Duncan is President/Founder of Gold Leaf Advisory, a comprehensive wealth management firm located in Mesa. He is an author, speaker and sought-after expert in retirement planning and implementation. His practice is designed to provide objective advice to individuals and businesses with net worth above $1 million. For more information, send an e-mail to info@goldleafadvisory.com.
Citations:
1 – www.forbes.com/sites/janetnovack/2011/02/15/the-big-decision-when-to-take-social-security/ [2/15/11]
2 – http://money.usnews.com/money/retirement/articles/2013/01/07/what-people-who-live-to-100-have-in-common [1/7/13]