These days, there is a lot of information out there on retirement planning -- probably more than at any other point in history. For the curious reader, that's a good thing -- as time and experience will help you wade through the noise to get to what's really important.
But every now and again I come upon an article that goes viral which is so full of basic mistakes that it makes me dizzy. Such articles are dangerous because their popularity will lead many not-so-curious readers to take all of its contents as gospel.
Last week, I ran into one such article titled "7 Common Myths That Can Ruin Your Retirement." Of the seven points presented, three were absolutely ridiculous.
On Medical Expenses
Average out-of-pocket recurring medical expenses for retirees are around $1,855 per year, not including hospital stays or nursing home care, according to EBRI. Factoring in inflation, and that non-recurring expenses tend to increase with age, that amounts to some $40,000 per year for a 30-year retirement.
No one will argue that saving for medical expenses is important. And I certainly won't dispute that many retirees probably haven't saved enough for this need. But what's written above makes no sense. Beth Braverman -- the author -- jumps from saying that that average retiree spends $1,855 per year on medical needs to a figure over 20 times that amount: $40,000 per year!
Of course nonrecurring expenses (like a hospital stay) and inflation will make that figure higher, but not by such a huge factor. I'm guessing what happened was that Braverman took a figure from a recent report by the Employee Benefits Retirement Institute and misapplied it. The ERBI states that, "Assuming a 2 percent rate of inflation and 3 percent rate of return, a person with a life expectancy of 90 would require $40,798 at age 65 to fund his or her recurring health care expenses."
In other words, recurring payments would cost $40,798 over the course of a 25-year retirement -- not per year. Big, huge, enormous difference!
On Social Security
Social Security isn't going to be much help. More than a third of Americans who haven't reached retirement age think that Social Security will be a major source of income in their post-work years despite the government program's ongoing funding problems. ... Social Security provides an average benefit of about $1,260 per month, which is already not enough for most people to live on.
Look, I'm not going to argue that Social Security has funding problems. But in the worst case scenario -- with the Social Security Trust Fund running out of money and Congress taking no action to remedy the situation -- Social Security will still be able to pay out between 73% and 78% of current benefits.
Further, Braverman fails to look at the bigger picture with Social Security. She looks at an individual's average benefits. But the vast majority of retirees live with their spouse, or are able to collect benefits if they have passed away.
Consider that the average couple claiming Social Security gets a monthly benefit of $2,176. On a yearly basis, that comes to over $26,000 per year. If Social Security were a nest egg, using the 4% rule, this would be equivalent to $650,000!
More importantly, the average household with people over the age of 75 spent $34,382 in 2013, according to the Bureau of Labor Statistics. That means that, for your average married couple, Social Security can cover over 75% of expenses. Of course, everyone's numbers will be different, but it's exceedingly safe to say: "Social Security will be a major source of income in retirement."
You're underestimating inflation. It's difficult for many pre-retirees to accurately gauge the impact inflation will have on those expenses. At an average 3 percent rate, your costs will double every 10 years.
This is simply beyond stupid. Of course you need to factor in inflation, but the math used here is just plain wrong. At an average rate of 3%, as claimed, it will take just over 24 years -- not 10 -- for prices to double. I have no idea how the author came up with this figure.
There are troubles, but they need to be kept in perspective
Someone who read this piece could have easily walked away thinking "$40,000 per year in medical expenses ... no Social Security ... prices doubling every 10 years ... I'm in deep trouble!"
In the end, Braverman is right to point out that we need to be proactive in saving for retirement. But I think taking an alarmist stance that's simply not based on the facts doesn't help anyone. Instead, let's stick to the facts and focus on what we have the most control over: spend less than you earn, invest the difference. Repeat every year until retirement.