The beginners guide to retirement part 8:Ten retirement myths

Myth 1 - NZ Superannuation will not be around when you retire

Maybe, maybe not. It could still be available in 40 years but it may be modified. The age of retirement could be 70. There could be a tiered a structure, where the longer you delay making withdrawals the more you get. Much like they do with social security in the United States. It could be means tested based on your asset levels. It could be significantly reduced. Max Key could be prime minister!

I didn’t mean to scare you with that last one. The point is we don’t know. All your retirement planning should be based on things you can control. Your earnings. Your savings. Your spending. Then, if you do get any payments from the government it is a nice bonus. Do not rely on superannuation to remain in its current state, if at all. My prediction is it will still be around but on a much-reduced capacity. No one knows though.

 

Myth 2 - NZ Superannuation and an inheritance will take care of me

As discussed above, we do not know if NZ Superannuation will even be around when we retire. Especially Gen X and millennials. Do not rely on NZ Superannuation. NZ Superannuation will not be enough. 

If you are expecting an inheritance I wouldn’t rely on that either. This is not an excuse not to save for retirement. There are just too many unknowns. You don’t know how long they will live. You don’t know if you will need the money before they die. Their fortune could be wiped out. They may go on a spending spree. They may divorce and re-marry, leaving the money to the new spouse, cutting you out completely

 

Myth 3 - You will never be able to retire at age 65

With the average age of life expectancy increasing towards 90 years old, there are a chorus of experts that claim we won’t be able to retire at age 65 with 25-40 years of retirement to fund. Yes, it is harder now, but not impossible by any stretch. If you refer to part two of the retirement planning series of articles, you will see on the table that if we work for 40 years and save about 10-15% of our income then we should be ok.

It is just a bit of scaremongering. Sure, not everyone starts saving when they first start their career. It just means you have a bit more catching up to do to get up to that 40-year savings rate of 10-15% per annum.

 

Myth 4 - It’s too late to start saving for retirement

According to the downloadable years to financial independence grid, if you earn $60,000 per annum for 40 years (to make the example simple to follow), you will need to save $5,000 per annum for 40 years. to get close to your required nest egg. If you delay saving until you are 45 after the kids are grown, then you will need to save almost 6 times more - $28,000 per annum. No, not easy. But if you want it and are willing to make sacrifices then definitely doable. Especially on dual income. A bit unrealistic not to have saved a cent before age 45 as well. Assumption used in calculations: 6% rate of return after inflation investing in predominantly stocks.

Even if you can’t save enough to get to your desired number, something is always better than nothing, so it is never too late. If you leave it until 10 years before retirement and save $10,000 per annum you will have $140,000. This is no small drop in the ocean. It won’t allow a luxurious retirement, but it may mean the difference between having the basics and not.

 

Myth 5 - It’s too early to start saving for retirement

Young adults starting out on their careers are often given the advice to go out and enjoy life. It is too early to start thinking about retirement. Just like it being never too late, it is also never too early.

I was given the advice by a family friend to spend all my money and enjoy it when I was first starting out. I was young and impressionable and respected this elder person’s advice. I thought they know more than me having been around the block a few times. I used this advice all through my 20’s, going out eating, drinking, not saving a cent.

My one regret now I am in my late 30’s – not starting to save and investing earlier. I have since found that you can still enjoy life just as much without having to spend so much.

The difference between starting saving for retirement between age 25 and age 35 can be double, at median income levels. The 25 year old earning $60,000 and saving $5,000 can retire in 40 years. To retire at the same time as the 25 year old, the 35 year old will need to save $10,000 per annum. Delaying 10 years has cost us an extra $100,000.

 

Myth 6 - I’ll delay saving for retirement until later when it’s easier

It may be easier later as you won’t have such a high mortgage if you own a house, and child expenses will be lower once they fly the coop. BUT, what is easy is not necessarily the best. We need bigger nest eggs than in years gone by since we are living longer. Waiting until just 15 years before retirement is not ideal.

By starting later, you are throwing away free money in the form of compound interest. The longer you wait, the more you must save each month. If we delay just 10 years, we will end up with HALF as much money compared to starting today.

 

Myth 7 – You’ll spend less in retirement

The problem is everyone is different, so this advice only applies to a small group. Some will spend less, some will spend more and some will spend about the same of their pre-retirement levels. The better alternative is to draw up a budget for your own unique situation based on what you want to achieve in retirement. Your budget will also be wrong because there are so many unknowns, such as the rate of inflation or needing healthcare. The future is unpredictable.

If you look back 30 years, could you have predicted with accuracy what you will be spending today? If you are younger than 30, you may struggle with this exercise! The answer is most likely, no. Your 30-year retirement budget will be no different. It is still much better to budget than not though.

 

Myth 8 – Retirement is age 65

People naturally retire at age 65 because this is when traditional superannuation payments started. When people start receiving benefits, it creates a disincentive to work. So, people naturally started to retire from work. Everyone did it and it became the standard.

No one said you have to retire at 65, it just become the norm. Well, no longer. Not by choice though.

In the 2017 Commission for Financial Capability survey, 75% of people surveyed estimated they would continue to work past the age of 65. Of the 75%, over half (54%) said they would have to for financial reasons. 36% cited value and satisfaction from work as their reason. The final 10% had ‘other’ reasons. 

These are big numbers that expect to work longer than the traditional age. Three quarters of us. The truth is, retirement is no single age. It is when you are ready, and can afford it. Unless of course, your health fails rendering you unable to work, or perhaps your employer forces a layoff through downsizing or a company ‘restructure’. Some will reach the point at age 45, others at age 80. Barring health or layoff, it all depends on how aggressive you were with your savings and how much you enjoy working.

75% state they will work past age 65, yet only 22% currently do. That is a massive disconnect between what we perceive will happen and what is actually happening. We may have the best intentions to continue working but we may not be able to for a platitude of reasons. We could get sick. Our partner of elderly parent/relative/friend could need our help. Our employer could kick us to the curb for a younger model. 

We could possibly work longer too. Retirement does not necessarily mean not working. To me, it means having the option to work. Working by choice is retirement to me. Because I would be doing something I want to, not because I have to. 30 years of not working may be unbearable for some people. This is why many people may be choosing second careers or part-time work. Some people are spending just as long in retirement as they are working. They are looking for something that fulfills their needs. Working like crazy for 40 years so that we can retire and do nothing constructive for another 30 years is not a great life for some. Why not smooth the ride out a bit longer so that we do not have to work so crazy?

65 may be a target, but chances are we will not hit it.

 

Myth 9 – Don’t invest in stocks

This advice made sense for previous generations when savings interest rates were higher and retirements were shorter. Losses couldn’t be risked on stocks because 15 years was not long enough to recover them.

Now we have the opposite – low interest rates and longer retirements. If the cost of living increases, then almost all our returns would be eaten by inflation at such low savings interest rates. A no risk portfolio in savings, term deposits and bonds is almost the riskiest of all.

If your retirement is likely to be 20 years or more, then a portion of stocks is generally encouraged to help combat the impact of inflation. An inflation rate of 3% will cut your nest egg in half in 24 years. Not only will stocks offer growth above inflation, but 20 years should be a long enough timeframe to counter any short-term risk. The percentage of your portfolio in stocks will depend on how much money you have, your risk tolerance and your personal retirement plan. Seek advice from a financial expert.

 

Myth 10 – I will not live to 90

The current life expectancy average suggests you may not make it to 90. But, averages are just that. Averages. It is only the middle number. There are still hundreds of thousands of people passing away on either side of the average. Both older and younger. You could be either, and don’t have much say in this.

If you die early and leave money behind, that is better than the alternative of living longer and running out of money. You will not regret the extra cash, but you will regret not having enough.

I do not recommending planning your life expectancy on the average. We really have no choice but to manage the risk by planning to live to 100. The risk of the alternative is too great to accept.

 

Final Thoughts

There is a lot of bad advice there that could derail the security of your retirement. The future is unknown and nothing is guaranteed. All we can do is follow our blueprint to minimise risks as much as possible, all whilst having back up plans and remaining flexible. Or even better, build a life that we don’t want to retire from.

So far in the series we have focused on how to prepare (financially and mentally) for retirement and how to make our our money go further. The final three articles in the retirement planning series will explain how we can protect our nest egg using insurance, estate planning and physical health.

 

 

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here

 

What is some of the bad/good advice you have received? Do you have any other myths that don’t cut the mustard?