4 Client Retirement Myths and Tips to Help Advisors Address Them

When knowledge gaps exist, they are filled with assumptions. In terms of retirement income planning, these gaps can lead to incorrect financial assumptions, which can make a happy and satisfying retirement seem difficult or even impossible to attain.

The "illusion of explanatory depth" is a cognitive barrier that leads people to feel confident in their understanding of a complex subject, despite having only superficial knowledge. It affects many aspects of life, interpretation of concepts like retirement and Social Security included.

In an interview with The American College of Financial Services, Rebekah Barsch, vice president of market strategy and training at Northwestern Mutual, cleared up some common client misconceptions about retirement income. She offered tips to help financial advisors educate their clients, overcome detrimental implications of knowledge gaps and develop the right retirement income strategy for them.

Client Myth #1: “I will only live between 15 and 20 years in retirement.”

Reality: People underestimate how long they will live into retirement. While a retirement time horizon of 20 years used to be standard, life expectancy is higher now than it was 30, 20 or even 10 years ago. Now, the average 65-year-old man has a 50 percent chance of living past the age of 87, while a woman of the same age has a 50 percent chance of living to the age of 90. The average life expectancy when considering a married couple is even higher, with a 50 percent chance that one spouse will live past the age of 94.

Advisor Tip: Educate clients on current life expectancies and the need to plan retirement income past their life expectancy. This strategy accounts for unexpected health care or other costs that arise, minimizing the risk of depleting retirement assets while still living.

Client Myth #2: “I only need 80 percent of my current income to have enough for retirement.”

Reality: Fourteen percent of people do spend less in retirement, but 35 percent spend the same, and 12 percent spend even more. It’s true that some expenses may disappear in retirement like college costs, home mortgages that have been paid off, and 401(k) contributions that cease. However, retirees face additional expenses that require consideration when determining an adequate retirement income including: increased health care costs, travel costs, and the fact that they may be in a higher tax bracket.

Advisor Tip: Barsch said that, “one of the best ways to determine how much is required for retirement is to sit down with clients and create a budget.” Determine what the client’s essential and discretionary expenses are going to be and cut back where necessary. This is a good opportunity to start a conversation with your clients about their future long-term care needs, possible beneficiary designations, and legacy building.

Client Myth #3: “Medicare will take care of all my health-related costs.”

Reality: Healthcare is a substantial retirement expense that must be carefully planned for. Medicare Parts A and B do not cover:

• Long-term care
• Insurance premiums for Medicare gap or prescription coverages
• Most dental care
• Vision
• Foot care
• Dentures
• Cosmetic surgery
• Acupuncture
• Hearing aids and fittings
• Co-pays

If your client needs these services they’ll be responsible for covering the expenses out of pocket unless they have medical insurance gap coverage. But even then, co-pays can become a concern. Out of pocket medical expenses — including Medicare premiums — for retirees run roughly $4,300 per year for an individual and $8,600 per year for a couple. Retirees with higher incomes will also have to pay larger Medicare Part B premiums. As of 2016, anyone who earns more than $107,000 annually must pay a monthly premium of $243.60, which is $73 more each month than retirees who earn less. 

Advisor Tip: When creating a budget with your clients, be sure to budget for out of pocket health care expenses and take into consideration the effects of inflation. Medical inflation has outpaced the general inflation regularly for half a century, sometimes by as much as 6 percentage points in one year.

Client Myth #4: “I can work a little longer to make up for retirement income shortfalls.”

Reality: Nearly half of retirees end up retiring sooner than expected, and the most commonly-cited cause was health reasons. Making the decision to work a few years past full retirement age is easy when a client is in their 40s or 50s and still planning. But Barsch cautions that as clients near retirement age, the practical reality of working longer may overcome the enthusiasm and energy they felt before retirement.

Advisor Tip: If the numbers falls short when calculating how much retirement income a client’s assets will generate, two common ways to increase the amount are saving more or working beyond full retirement age. Saving more requires immediate action and can affect the client’s lifestyle while still working, but this tactic may prove more attractive or realistic than working beyond full retirement age. One of the best things for an advisor to do if a client has this misconception is to begin educating the client early about the practical realities of working longer and chance of health care needs rising with age. Many times clients are simply unaware of all the costs and expenses they will have in retirement and a simple yet thorough conversation is all they need to recognize the value of saving more and saving early.

Do your clients believe in these and other retirement planning myths? Discover what areas of retirement income knowledge Americans are lacking and become your client’s trusted retirement income expert. Download America Fails Retirement Literacy Quiz and get the results of a groundbreaking retirement income survey that identifies Americans’ significant lack of retirement education.