This is the third installment of my column, "A Retirement Reality Check: Dispelling The Myths". The first installment appeared in October 2002.

An Overview:
Over the past few decades, the concept of retirement has acquired a folklore all its own. One can liken it to a number of urban legends - those tales that become taller each time they are told. As people dream of their own retirement, they often perpetuate the myths and misconceptions they've heard by passing them on to their family, friends and business colleagues.

Whether you are planning to retire in five years or are just beginning your career, you should be aware of the following are ten myths. I will present the myths in three parts over the next three months.

Ten Retirement Myths

1. Retirees need 75% of their pre-retirement income to live comfortably in retirement
2. Retirement income will come equally from Social Security, personal savings, and pensions.
3. Retirees should emphasize fixed income assets, such as CDs and bonds.
4. All retirees stop working when they retire.
5. Retirees should only plan to support themselves when they retire.
6. Retirees should give away their assets so their heirs can avoid estate taxes.
7. Medical expenses and nursing home costs will be taken care of by Medicare.
8. Family inheritance is a reliable source of retirement income.
9. There's a point where it's too late to ever catch up.
10. Saving for retirement doesn't need to be a top priority for those starting a career.

Dispelling the Myth

• The majority of care provided in nursing homes is custodial care, which Medicare does not cover.
• Even with Medicare coverage, health expenses often consume nearly 20 % of the retirees' income.11
• As health care costs continue to rise, it is likely that retirees will wind up paying a larger percentage of their medical bills than they do today.
• According to a survey by the U.S. Department of Health and Human Services, only 37% of employers offer retiree health benefits and about 85% of those intend to reduce those benefits within the next 5 years.12
• Retirees may find they need to fill the gaps with supplemental health insurance to minimize their own expenditures on care.
• In the past, many individuals chose to "spend down" their assets in order to qualify for government assistance. A federal law now governs the time-period in which people who are old and sick can "spend down" their assets to qualify for this assistance.
• Long term care insurance can help protect hard-earned assets, yet HIAA estimates that only 6% of Americans have this insurance.13

The Bottom Line
Medicare generally pays for less than half of retirees' medical bills. Retirees must do their part to protect themselves and their assets.


Dispelling the Myth

• The $10.4 trillion "Great Transition" inheritance windfall will be distributed over many years and won't be distributed evenly among all Boomers. Some will receive a substantial inheritance; others will receive no inheritance money.
• Catastrophic illness or nursing home costs could erode inheritance money before it is passed on to the next generation.
• In general, inheritances are unlikely to augment Boomers' retirement resources significantly14:

• Any inheritance amount must be split between all siblings.
• The degree to which the resources of the elderly are annuitized may mean a smaller-than-anticipated inheritance as the income flow ceases when the recipient dies.
• There is some evidence that today's retirees are spending down their assets at a much faster rate than their predecessors.
• Because they will live longer, the Boomers' parents will deplete more of their assets.
• The desire to leave something for the next generation seems to be weakening over time.

The Bottom Line
Don't count on it. A variety of unforeseen expenses could erode any inheritance money before it can be passed on to the next generation.


Dispelling the Myth

• Those close to retirement may need to adjust their standard of living or make other changes to retire comfortably.
• Saving just a little extra each year and investing it to earn moderate returns can add up to a much more comfortable retirement. If an individual cuts just $10 per day from his spending, he can accumulate enough each year to make the maximum $3,500 annual contribution to an over-50 IRA.15
• Many individuals may now be eligible to take advantage of the tax law approved in June 2001 that offers catch-up provisions for workers who are older than age 50.
• Those close to retiring may wish to consider continuing to work at least on a part time basis, or taking a more gradual route to retirement
• Gradual retirement can make a big difference in retirement income16:

• The money has more time to grow before it must be tapped into.
• Each year spent working is one less year of retirement that will need to be funded.
• If the date at which Social Security collection is delayed, that income will increase.

The Bottom Line
Whatever the age, individuals cannot afford to not make an effort to catch up. The quality of their life in retirement depends on it.


Dispelling the Myth

• It is better to participate in a 401(k) for a longer period of time than to contribute more money during a shorter period of time due to the effect of compounding.
• The advantages of compounding are greater the earlier one begins to save. For example, to accumulate a $200,000 nest by age 65, an individual must save about $26 per week if he begins at age 35. But if he waits until he is age 55 to start, he will have to put aside $233 per week.17
• Contributions to an employer's 401(k) plan may reduce an individual's current taxation and the taxes are also deferred on earnings.
• Employers may also match all or part of an employee's contributions, thus, giving them money they would not otherwise have.
• As people get older, they tend to have more financial responsibilities, including mortgages and children, thus, reducing the ability to contribute the desired maximum amount to retirement vehicles available to them.

The Bottom Line
No one is too young to start saving for retirement. Saving even a small amount now can allow a future retiree to reap big rewards down the road.

11. Revisioning Retirement Survey,' AIG SunAmerica, April 2002
12. Three Myths That Could Wreck Your Retirement,' Third Age Money Newsletter, www.thirdage.com
13. 'Common Retirement Myths,' Bank One, www.bankone.com
14. Study: 'Americans Nearing Retirement Ignorant About Cost of Care,' December 11, 2001
15. www.cnn.com
16. The Baby Boomers Mega-Inheritance: Myth or Reality?' Federal Reserve Bank of Cleveland, Oct. 1, 2000, 17. www.clev.frb.org
17. 'Everyone Back in the Labor Pool,' July 20, 2002, www.time.com

* Both cases assume that money is invested earning a hypothetical 9% return. This example is for illustrative purposes only and is not intended to reflect the actual performance of any security. Investing involves risk and you may incur a profit or loss.

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