In this episode of ThimbleberryU, we dive into part two of our series on debunking retirement myths with Amy Walls from Thimbleberry Financial. We explore five common misconceptions that can hinder financial planning for retirement, starting with the belief that Social Security alone can sustain retirees. Amy explains that Social Security is designed to cover only about 40% of pre-retirement income, meaning additional savings are crucial to maintain one's lifestyle. We also touch on the underestimated impact of healthcare costs, taxes, and inflation, all of which can stretch finances even further.
Next, we tackle the myth that retirees will naturally spend less. While some costs like commuting might decrease, other expenses like travel, hobbies, and particularly healthcare, often increase. The Bureau of Labor Statistics reports that households led by those 65 or older still spend an average of $48,000 annually, suggesting that retirement spending is not always significantly lower than during working years.
We then discuss the misconception that retirees should avoid stocks to protect their savings. Amy challenges this idea, pointing out that retirement often spans 20-30 years. Having stocks in a diversified portfolio can be essential to outpace inflation and maintain purchasing power. Reducing stock exposure too drastically can actually increase the risk of losing value over time.
Another myth we address is the notion that retirees can always return to work if they run out of money. While it might seem like a safety net, factors like age, health, and the ability to find suitable work can make this option less reliable than people believe.
Finally, we debunk the myth that it's too late to start saving for retirement. Amy emphasizes that even late contributions can grow significantly through compound interest and make a meaningful difference in retirement planning. Jag adds that retirement is a long period of time, not just a line in the sand.
In closing, Amy reminds listeners that small, consistent efforts toward saving and planning can improve their financial future, regardless of their starting point. As always, the advice here serves as a guide, but consulting with a financial professional is key to personalized retirement planning.
Jon Gay (00:07):
Welcome back to ThimbleberryU, I'm Jon JAG Gay. Amy Walls from Thimbleberry Financial joins me for part two of our series. Amy, our final 5 in our 10 retirement myths that we are debunking today.
Amy Walls (00:19):
Jag, it'll be fun to talk about these today.
Jon Gay (00:21):
Absolutely. The first one is a big one I think, and that is social security. I think a lot of folks believe they can rely solely on social security for their income in retirement. Let's talk about the reality that is behind that.
Amy Walls (00:34):
Social security is designed to replace only about 40% of your pre-retirement income which means there's a need for additional savings. Imagine you've got this income stream that's going to replace about 40% of your pre-retirement income needs.
Therefore, you need to replace about 70 to 80% of your pre-retirement income to maintain your standard of living. That's why social security doesn't cut it. Now, you might say, “Well, 40% plus 70 or 80% is 110 to 120%,” that doesn't make sense.
Jon Gay (01:12):
Read my mind.
Amy Walls (01:13):
We've got some increased costs potentially with healthcare, we've got taxes to account for. So, I'm trying to account for all of that in giving some rough numbers.
Jon Gay (01:24):
Inflation too. Let's not forget that.
Amy Walls (01:26):
Absolutely. It's not enough as I said, but it is a valuable piece of the puzzle. 40% of retirement income, it's nothing to sneeze at.
Jon Gay (01:36):
It's an important piece but definitely not the whole thing. Myth number two today, you'll spend less in retirement. That sounds good. People say you're going to spend less in retirement. I gotta imagine that's also a myth.
Amy Walls (01:48):
I'm going to say absolutely, from my experience. Now, it's not true for anybody. This is not a world where things are black and white. Different people do different things differently, they have different goals.
But from the vantage point that I approach things at as a financial planner and the people I work with, people are goal oriented. They are looking to retire to something rather than get away from something.
And while you might spend less on commuting or other work-related costs, there are other expenses like healthcare, travel, hobbies that people (well outside of healthcare) look forward to. What do you want to be doing? Where do you want to be going? How do you see spending your time?
Imagine you're on vacation, do you spend more in a week on vacation or two weeks on vacation that you do while working for a week or two?
Jon Gay (02:49):
I hope that's a rhetorical question. Because I'm thinking about my spending habits on vacation.
Amy Walls (02:54):
For most people, that's an absolute yes. I spend more. Now, do you spend at that rate when you're in retirement? Probably not. You're still doing more things. The Bureau of Labor Statistics reports that households led by someone aged 65 or older still spend an average of $48,000 annually.
Now for some people that $48,000 a year may not sound like a lot, but if you have higher than average income while you're working, there's a good chance you're also going to have higher than average spending and desires to spend once you're retired.
Jon Gay (03:34):
That makes sense.
Amy Walls (03:35):
And then the last thing here which we touched on, is planning for the unexpected. None of us know what our healthcare costs are going to be in the future. We don't know what will happen to us and so, we have to prepare for that and that can really increase those costs.
Jon Gay (03:52):
For sure. So, it's not necessarily less spending, but different spending in kind of the grand scheme of things.
Amy Walls (03:58):
Absolutely. That's a great way of saying it.
Jon Gay (03:59):
Our next myth is that you should avoid stocks to protect your savings. Let's talk about this.
Amy Walls (04:06):
This is an interesting one. So, the idea behind this being that once you're retired, your investments should become more conservative. In principle, I don't necessarily agree with that. I agree with investing according to the risk you are comfortable with.
I call it the “you can sleep at night” test as well as what you need. Sometimes those things need to work together. Here's where this comes from. Back when my grandfather retired, retirement lasted five years. Today, we can expect retirement to last 20 easily 30 or even more years.
So, when we're looking at that, that's essentially the same as the number of our working years if we start out. If we look at that, it's similar to the number of working years we have. So, if we're planning that retirement's going to last about 30 years, let's take a step back and say, “Gosh, I am 25-years-old starting my first career. I'd ideally like to retire around 65.”
So, I have 40 years to plan for an approximate 30-year retirement. Alright? Both 30 years and 40 years or even if we shrink the retirement, say 20 years and 40 years, those are long timeframes, they aren't two to three years.
And stocks typically outperform inflation and especially do so over the long term. So, if our retirement was only going to be five years, I think this wouldn't be a myth that we don't need stocks in our portfolio.
But when we need retirement assets to last similarly to, we're starting to save throughout our career to be able to retire, we need these assets to continue to grow into the future and stocks are part of a well-diversified portfolio that can allow that portfolio to keep growing.
Here's the other piece. The more conservative we become, the more we run the risk of inflation outpacing growth on our dollars. And that matters because as I said, stocks lead to that growth. But the biggest risk to retirees is that inflation outpaces growth on their money because it feels secure. But in reality, they're losing purchasing power each and every year.
Jon Gay (06:48):
It's a really good point, and I think we've talked about in previous podcasts, instead of thinking of retirement as this line of demarcation in the sand, you want to be planning throughout that long retirement, as you were just mentioning Amy.
Instead of saying, “I have to get to 2045 when I'm going to retire.” No, you want that money to last at 2045, ‘55, ‘65, ‘75 and so forth and being diversified can help with that. So, being invested in the market can actually help your money last longer, right?
Amy Walls (07:18):
Absolutely. It just has to be in the right percentages.
Jon Gay (07:21):
And that's going to be different for everybody.
Amy Walls (07:22):
Absolutely.
Jon Gay (07:24):
Our next myth, you can always keep working if you need more money. If you need more money, just go back to work.
Amy Walls (07:30):
I like this, Jag. This is kind of the opposite of the myth that we talked about in our last episode where retirement just means not working at all. So, you can always keep working if you need more money.
In theory, this is true. If I need more money, I can find a job and I can work. Well, my questions to you are how much money do you need? Are you able to get a job earning that after you maybe haven't worked 5 or 10 years? Is your health going to allow you to perform well at that job if you can get it, to be able to keep that job? And is your health going to allow you to work enough years to fill whatever gap you have?
I think those are the big questions around this myth and we can't concretely say, “Yes, we are in control of that.” We can do some things to influence that, but it's primarily outside of our control and so that's why this is a myth.
Jon Gay (08:33):
Yeah. You don't want to just kick the can down the road and say, “I'll just go back to work if I need to.” For all the reasons that you just mentioned, that's a really dangerous assumption to make.
Amy Walls (08:42):
And let's not think about going back to work in retirement but the Center for Retirement Research found that 37% of retirees had to retire earlier than they planned to due to health problems. That's people retiring earlier, not going back to work. So, I can only imagine that the number not able to go back to work is even bigger.
Jon Gay (09:01):
That makes sense. Alright. Our final myth today, Amy, it's too late to start saving. What would you tell one of our listeners that feels that way?
Amy Walls (09:09):
It's never too late. It's never too late to start saving because even small contributions grow over time with compound interest. Even dollars saved in your 50s and 60s can have a significant impact on retirement.
It's all about putting the pieces together around social security, pension, savings, et cetera, so that your retirement can be the best it can be. And if we say it's too late, then we're throwing in the towel and basically choosing that we can't influence or control this.
And while we can't control it, many of our choices in life, definitely our choices around saving will have an impact on what that lifestyle looks like. So, every bit helps.
Jon Gay (10:04):
You don't want to say that's too late, never ever. It's never too late to put money away because you never know how long you're going to be around to need it.
Amy Walls (10:11):
Yep. It's the same as saying it's too late for me to start exercising.
Jon Gay (10:16):
Amy, great stuff as always today. I mean, there are so many myths out there. We've only covered 10 in these previous episodes, but there's probably a hundred if we really set our minds to it. Well, we're going to stop at 10, in the meantime, if any of our listeners want to talk to you and your team at Thimbleberry Financial, how do they best find you?
Amy Walls (10:30):
They can get ahold of us at thimbleberryfinancial.com or by giving us a call at (503) 610-6510.
[Music Playing]
Jon Gay (10:38):
Great stuff, Amy. We'll be back in a couple weeks.
Amy Walls (10:41):
Sounds good. Thanks, Jag.
Jon Gay (10:44):
Securities offered through registered representatives of Cambridge Investment Research Inc, a broker-dealer member of FINRA/SIPC. Advisory Services through Cambridge Investment Research Advisors, Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.
Securities offered through registered representatives of Cambridge Investment Research Inc, a broker-dealer member of FINRA/SIPC. Advisory Services through Cambridge Investment Research Advisors Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.