Retirement

5 Common Misconceptions About Retirement

By Chris Duderstadt

November 29, 2023

5 Common Misconceptions About Retirement

Key Points – 5 Common Misconceptions About Retirement

  • Understanding the Impact of Forward-Looking Tax Planning
  • Key Considerations with Claiming Social Security
  • Retirement Isn’t Just a Walk in the Park if You Don’t Plan for It
  • Your Financial Plan Needs to Incorporate Your Specific Goals
  • 8 Minutes to Read | 24 Minutes to Watch

5 Common Misconceptions About Retirement

Are you planning to meet up with any friends or family members this holiday season who are approaching retirement or recently retired? Or maybe you’re in that position yourself? That can be a very exciting time, but it can quickly become very stressful if you haven’t planned for it. The goal is for every day to be a Saturday in retirement, but getting to that point isn’t that simple. We’re going to review the following five misconception about retirement to help you and your loved one prepare for retirement.

  1. Paying zero in taxes is always the best case.
  2. Claiming Social Security as early as possible.
  3. Retiring early is easy if you have enough money.
  4. Retirement is all fun and relaxation.
  5. We don’t have enough money to [insert goal].

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1. Paying Zero in Taxes Is Always the Best Case

The first misconception about retirement that we want to cover is that paying zero in taxes is always the best case. Believe it or not, but that isn’t true.

If you live in the United States and you have money or make money, taxes will be a fact of your life. It’s not about paying zero taxes each year; it’s about figuring out how to pay as little tax as possible over your lifetime. To do that, you need to have a long-term, forward-looking tax strategy.

A Tax Planning Example

Dean Barber and Bud Kasper, CFP®, AIF® have seen numerous occasions of people being amazed by how much they can create in tax savings by utilizing proactive tax planning. Dean recalls meeting with a prospective client in the mid-to-late 2000s who showed him two years of tax returns in which he’d paid no taxes. That person was 62 years old and didn’t think there was any way that they could do any better from a tax savings perspective. At that point, Dean had a few questions for this person.

  • Do you have money in IRAs?
  • How are you living?
  • What’s supporting your lifestyle?

This prospective client had a couple million dollars in IRAs and a bunch of money saved in the bank, so he’d been living off that. They figured that they enough for three or four years, and then would start taking money out of their IRAs. That led Dean to ask another question.

  • When you sat down and did your taxes, and your CPA told you that you could have taken about $35,000 out of your IRAs and paid zero taxes on that, why you didn’t do it?

Working with a CFP® Professional and CPA Together

Dean’s question perplexed this person. Dean also pointed out that they also weren’t taking advantage of their standard deductions and personal exemptions. They could have taken out everything up to the standard deduction and paid no taxes on the IRA distribution.

Another option would have been to convert to a Roth IRA so it would grow tax-free. They could have converted over $90,000 to a Roth IRA and paid only $11,000 on it. That means that wouldn’t have needed to pay any more taxes on that $90,000 or any future growth from it, and neither would their kids if they inherited it.

As Dean went back even further over this person’s tax history, he noticed that this person missed out on getting almost $500,000 from their traditional IRA to a Roth IRA. And it was all because they were so focused on paying zero taxes each year. It didn’t help that the CPA they had been working with was just focusing on tax mitigation for each year.

What Tax Planning Opportunities Are Available to You?

Our CPAs work alongside our CFP® Professionals to review financial plans from a tax perspective. They look for tax planning opportunities, such as Roth conversions, to help people figure out how they can pay as little tax as possible over their lifetime rather than in one year. The idea of paying zero taxes each year is a retirement misconception that our whole team is passionate about debunking.

“Most people spend from the wrong accounts in the early years of retirement while trying to pay as little tax as possible. They ignore the ticking tax time bomb that is in their IRA or 401(k) when Required Minimum Distributions kick in that can wreak havoc on their overall financial situation.” – Dean Barber

Working together with a CFP® Professional and CPA can really be an eye-opening experience with the opportunities that are oftentimes uncovered. We’re happy to offer more insight on what the CFP® Professional and CPA relationship can offer a client. We also encourage you to learn more about important tax planning considerations by downloading our Tax Reduction Strategies guide below.

Misconceptions About Retirement

Tax Reduction Strategies Guide

“You need to have an exit strategy as you leave the workforce and start living off the money that you’ve accumulated. All of your assets need to be brought together in a format that doesn’t just look at the next year or two year, but at the next 10 or 20 years.” – Bud Kasper, CFP®, AIF®

2. Claiming Social Security as Early as Possible

The second common misconception about retirement is that Social Security claiming age is synonymous with the day that you retire. This has become an even bigger misconception about retirement given all the buzz surrounding the Old-Age and Survivors Insurance and Disability Insurance Trust Funds being projected to run out by 2033. That’s leading people to want to start claiming their Social Security when first eligible at 62.

Social Security, especially if you’re married, should not be looked at as a singular benefit. It needs to be viewed at as a couple’s benefit. People need to understand that when you’re married, a couple at age 62 will have over 600 different iterations on how they can claim Social Security. The difference between the best and the worst decision oftentimes leads to a substantial amount of additional income while still having the same earnings history for the same life expectancy.

“When we do claiming strategies for people, we need to understand their earnings history, family health history, current health, spouse’s family health history, and spouse’s current health.” – Dean Barber

Getting the Best Net Benefit for You and Your Spouse

Always remember that the longer you delay claiming Social Security, the bigger the benefit will be. The goal is to maximize you and your spouse’s benefit over the course of your respective retirements.

“What claiming strategy gives you the highest probability of success of achieving your overall financial objectives.That’s the bottom line.” – Dean Barber

However, there are some instances where it doesn’t make as much sense to delay. There was an unfortunate scenario for a client couple that Dean has worked with where the wife was diagnosed with a rare blood disease. The wife retired at 63, and Dean instructed her to claim Social Security upon retirement. Her benefit will be smaller than her husband’s benefit, who is planning to delay claiming until 70.

Hopefully, the wife prognosis improves, but they need to keep in mind that when the first spouse dies, the surviving spouse only gets to keep the larger of the couple’s two benefits. The smaller one goes away. That’s why Dean advised the husband to delay so that his benefit will be as large as possible to help fund his retirement for as long as possible. We reviewed several key items to keep in mind when claiming Social Security in our Social Security Decisions Guide, so make sure to download your copy below.

Social Security Decisions Guide

3. Retiring Early is Easy If You Have Enough Money

The third misconception about retirement is that retiring early is easy if you have enough money. Some people can do it, some can’t.

“That’s a simple statement to make, isn’t it? But the practicality of this is that you need to see what the ramifications are going to be 10, 15, 20 years later.” – Bud Kasper, CFP®, AIF®

We touched on life expectancy a little bit when discussing Social Security. While we hope everyone lives long and healthy lives, what if someone only expected to live until 80 but ended up living into their 90s?

Living longer is great, but financial stress can mount in a hurry if you start running out of money in retirement. Longevity risk is a very real risk, so it’s something that you need to plan for. Hence why it’s oftentimes advisable to delay claiming Social Security to maximize that benefit over your lifetime.

Taxes and Health Care Can Quickly Erode Your Wealth

Two of the things we’ve already touched on—taxes and health care—are two of the biggest wealth-eroding factors in retirement. You might be able to retire early if you have enough money, but can you get through retirement? Having that forward-looking tax plan and health insurance that meets your specific health care needs are crucial to getting through retirement.

We always like to start working with people about 10-15 years before they retire so we can effectively build a goals-based plan. Once we outline a couple’s needs, wants, and wishes, we create a spending plan for them. What income sources do you have and how are you going to utilize them when you go from the accumulation phase to the distribution phase of your life (retirement)?

When most people come to us for the first time, we usually see that they have most of their money in a traditional 401(k). And there’s not necessarily anything wrong with that. The fact that you’ve been saving for retirement means that you’re off to a good start.

But remember that you should never save money somewhere without first knowing the rules for how to take the money out. Your traditional 401(k) consists of tax-deferred assets whereas a Roth 401(k) grows tax-free. The goal is to distribute your assets across all three tax buckets—tax-deferred, tax-free, and taxable. That way you’re not subjecting yourself to unnecessary risk by having all your assets in one bucket.

4. Retirement Is All Fun and Relaxation

Number four on our list of common misconceptions about retirement ties in very closely with our last misconception about retirement. It’s that retirement is all fun and relaxation. Don’t get us wrong; we hope that you’ve thoroughly planned for retirement so that it does include a lot of fun and relaxation.

However, there are various uncertainties that everyone will need to deal with in some shape or form. There are a lot of uncertainties that are out of our control, such as inflation, interest rates, and the markets. But while those things aren’t within our control, we can still plan for them.

“If you want to focus on retirement being full of fun and relaxation, realize that we have a finite amount of time on this earth. We don’t know what that time is, so plan accordingly.” – Dean Barber

What Do You Want Your Retirement to Look Like?

One of the things that people actually struggle a lot with when they’re beginning retirement is what they’re going to do. For so many people, their job has been their identity for decades. What is your retirement lifestyle going to look like? Again, this goes back to building a goals-based plan that’s unique to you.

As we take new clients through our Guided Retirement System, we’re not talking to them right away about their investments. We want to know what’s important to them. Then, we’ll start figuring out costs for their specific needs, wants, and wishes, and build a spending plan accordingly. Think of your investments as the engine that makes your plan run.

You’ll also notice in our Retirement Plan Checklist that planning for retirement involves financial planning and non-life financial planning. It’s crucial to really take some time to think about your goals for retirement. Our Retirement Plan Checklist can help with that. It consists of 30 yes-or-no questions and an age-based timeline of important retirement considerations. Download your copy below!

Misconceptions About Retirement

Retirement Plan Checklist

5. We Don’t Have Enough Money to [Insert Goal]

That leads us right into number five on our list of common misconceptions about retirement. Too many people think that they don’t have enough money to do certain things. Some of those uncertainties that we mentioned earlier can feel very overwhelming. For example, Dean says all the time that inflation makes people live like they’re broke, but it won’t cause you to go broke. It’s something that you need to plan for.

Stress Testing Your Financial Plan

How do you plan for it, you ask? In the case of inflation and other types of risk, we plan for them by stress testing your financial plan against a multitude of economic conditions to see if your plan can still get you to and through retirement. If someone had a plan that didn’t incorporate an inflation factor to their daily expenses, they probably experienced quite a bit of pain over the past couple of years. That’s why we use a 4% inflation factor for daily expenses and 6.5% inflation factor for health care costs that are based on historical averages.

Stress testing your plan isn’t something that you just do once as you’re building your plan. You need to do it regularly as your circumstances change. Let’s say you have a goal of taking a big family vacation next year. Rather than put it off because you’re concerned about the markets or other risk factors, put the trip into your plan and stress test it.

When you stress test your plan with our financial planning tool, you will find out a probability of success percentage. That percentage lets you know your odds of doing what you want to do in retirement without needing to adjust your spending. The ideal probability of success range is around 75%-90%. If you get up into the upper 90% range, that means you’re likely not spending enough, saving too much, or not taking on enough risk.

So, if you put that trip into your plan and are comfortably in that range or above it, what are you waiting for? Obviously make sure to consult with your advisor first, but they’ll likely tell you to take the trip!

“It’s a big mindset change to go from saving to spending. People can get scared to spend and the plan will actually validate that it’s OK to do it.” – Dean Barber

Do You Have Any Questions?

It can be so hard for some people to muster the confidence to do that, though, if they don’t have a plan in place. If you have any questions regarding these misconceptions about retirement or how to go about building your plan, start a conversation with us here.

Schedule a Meeting

Having the clarity from a financial plan that gives you confidence to live out your retirement lifestyle can truly be a life-changing experience. Working with a team of professionals that focus on your retirement goals, taxes, investments, and your estate planning and insurance needs is critical so that you know all your bases are covered. Our team is ready to work for you and make sure that you’re crystal clear about these misconceptions about retirement.

5 Common Misconceptions About Retirement | Watch Guide

00:00 – Introduction
02:34 – The 5 Common Misconceptions About Retirement
03:04 – #1: Paying Zero in Taxes is Always the Best Case
08:26 – #2: Always Claim Social Security as Soon as You Can
12:05 – #3: Retiring Early Is Easy If You Have Enough Money
17:04 – #5: We Don’t Have Enough Money To [Insert Goal]
19:59 – #4: Retirement Is All Fun and Relaxation
22:06 – What We Learned Today

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.