By: David I Gensler, MSPA, MAAA, EA
What if I had come up to you in January and said that I would give you 5,000 to 1 odds on these two things happening in 2016: the Cubs will win the World Series and Donald Trump will be the next president of the United States. Would you have taken my bet or checked to see if I had forgotten to take my meds? We have been trained to make decisions based upon events that have happened in the past. Or, if we are told something often enough by people who we perceive to be experts, we believe them. Maybe we even make some pretty important decisions based upon their recommendations (Lehman Brothers go out of business? Ridiculous! Buy their stock and then buy some more!). Here are four retirement “sure things” that you need to question:
You Will Be In A Lower Tax Bracket In Retirement
This statement has been presented to us as gospel for so long, we can repeat it back in our sleep. Defer income taxes now, while you are in a higher tax bracket and then take the money out in retirement, when you are in a lower tax bracket. So when you begin to dip into your retirement nest egg, you will pay less in income taxes. But future tax rates and income levels cannot be predicted with a great degree of confidence. Being in a lower tax bracket in retirement may turn out to be an assumption, not a certainty. If it is only an assumption, then what?
Aren’t All Target Date Funds Pretty Much The Same?
Target Date Funds (TDFs) are far and away the investment vehicle of choice for most 401(k) participants. It is not unusual to see anywhere from 70% – 85% of the participants’ assets dedicated to their 401(k) plan’s TDF. The concept of a TDF is simple. Its execution is not. Different managers of TDFs have different ideas about how they should be run. Things like asset allocations, glide paths, fees, proprietary fund offerings and benchmarks can vary widely. There is even a fair amount of dissention among the experts about the correct way to differentiate a “good” TDF from a “bad” TDF. Remember Henry Ford’s statement about which color car his customers could purchase? (They can have any color they want, as long as it’s black). You used to be limited to the one proprietary TDF that was on the plan’s menu. Now, most providers no longer lock you into their own TDF. Has anyone looked to see if there are other, better TDF choices in your 401(k) plan than the one that you currently have? You might be surprised by the answer.
You Will Need To Replace About 70% Of Your Pre-Retirement Income After You Retire
Your “replacement ratio” is defined as that percentage of your pre-retirement income that is available to you post-retirement. Many financial planners and government policy wonks have told us that our replacement rate is the key factor that we need to use when we measure our “retirement readiness.” Imbedded in the 70% retirement readiness calculation is the assumption that we will spend less in retirement. On the face of it, that makes sense. Housing, work related expenses and other miscellaneous expenses may very well go down. But often overlooked are certain expenses like medical costs, long term care expenses and general inflation that may very well cause your post-retirement expenses to go up. You and your adviser need to do your own retirement readiness calculation. One size very rarely fits all.
If I Cannot Afford To Retire I Guess That I Will Just Keep On Working
So you think that you control how long you will work? Guess what, you don’t! According to the 2016 Retirement Confidence Survey (RCS) 46% of retirees (that’s almost 1 out of 2) leave the workforce earlier than they expected. A physical hardship, such as a health problem or disability or changes at your employer (downsizing or closure) is out of your control. The bottom line, the ultimate timing of your retirement may not be your choice.
There is no such thing as a “sure thing” (if you don’t believe me, go talk to Hillary Clinton). Hear what the experts have to say. Then be prepared to push back and ask some hard questions of your own. If you base your retirement on a set of false assumptions, it may be too late at that point to take corrective action.