The Top Faulty Retirement Assumptions

Many people who’ve never done any formal financial planning believe they’ve taken the right steps to put them on a steady path to retirement. But when that time comes, they are often shocked to learn the lifestyle of tennis and travel they envisioned will have to be drastically scaled back.

The following are faulty assumptions many people make that undermine retirement plans and prevent them from retiring when they want with the lifestyle they want.

  • “I’ll be OK because I’m investing the maximum amount in my company 401(k) plan.”

While it is certainly your best move to invest the maximum amount to your employer-sponsored retirement plan for tax-deferred savings, especially if it offers a company match, recent statistics indicate your 401(k) savings alone will not be adequate. The typical 50-year-old has less than $130,000 saved in his or her account; workers 60 and older have slightly more than $136,000. That’s enough to generate just $6,000 to $7,000 a year of income during retirement, assuming they withdraw no more than 5 percent of their accounts each year. Given these numbers, it makes sense to consider investments outside of your company 401(k) to enhance your retirement nest egg.

  • “My parents are leaving me and my siblings their estate, and I can retire on that.”

Recent data shows that inheritances are shrinking. In 2004, according to the Federal Reserve, the median inheritance was $29,000 — enough to buy a new sedan, but hardly enough to quit your day job. Although the overall pie of inheritances has grown to nearly $200 billion annually, experts predict baby boomers will receive smaller pieces, in part because old age has gotten more expensive and the typical boomer has more than two siblings. The bottom line: Don’t count on those family assets being there for you when you need them.

  • “The equity in my house has quadrupled over the past 25 years and I can tap into that for retirement.”

Home equity is an important part of any retirement plan. But many investors fail to recognize that escalating housing prices cut two ways. On the one hand, the value of your home has increased, in some cases by more than 100 percent. On the other, you’ll have to find someplace to live when you cash out of your primary residence. That’s likely to cost you plenty — and give the seller a little more cushion for their own retirement.

  • “Inflation will remain low.”

Workers usually keep up with inflation through pay raises. In retirement, however, people must increase their income to keep pace with the cost of living. True, overall inflation has remained low in recent years, but that doesn’t mean some prices aren’t rising. Just take a look at your last heating bill.

Your retirement should not be left up to chance, so when you are planning yours, don’t let faulty assumptions determine the quality of your retirement.

One thought on “The Top Faulty Retirement Assumptions

  1. “I’ll be OK because I’m investing the maximum amount in my company 401(k) plan.”
    – the examples given in the paragraph following the statement are faulty – the comparison is between someone investing the maximum in their 401k with the “typical” 50 or 60 year old. People that max out their 401k are not “typical” and wouldn’t engender the stated statistics in the first place.
    consider this – right now the max 401k is $15,000/year so over 10years you’re looking at $150,000 in principal alone which by itself is above the $130,000 mark listed in the article.
    If a 50 or 60 year old only has $130k-140k then they more than likely havn’t been maxing out their 401k and if they were, they certainly would not have been doing it for very long

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