When retirement assumptions and reality collide

Having spent the first 20 years of my working life sailing on oceangoing cargo ships, I know a thing or two about voyage planning and making corrective actions when needed.

Even the most disciplined investors can face unexpected hurdles as they try to reach their financial goals. Sometimes, we presume that we have greater control over our financial course than we really do.

Here are four assumptions retirement savers often make – and how reality can intrude. For each assumption, I offer a course correction to help manage events that you might not anticipate.

Assumption 1: My expenses will be lower in retirement.

Reality check: Many retirees find they spend just as much money in retirement as they did while they were still working, with out-of-pocket medical costs a common surprise. Plus, most want to travel and pursue other passions, and those costs can quickly add up.

Course correction: When estimating your retirement savings goals, assume your current expenses will remain the same, minus the amount you’re setting aside annually toward retirement. Then calculate your target portfolio size and how much you need to save each year.

Assumption 2: Medicare will cover my healthcare costs.

Reality check: Medicare doesn’t cover many of the health-related expenses retirees encounter, including most dental, vision and hearing care. Perhaps more important, you have to pay out of pocket for any long-term care you need, unless you obtain supplemental insurance in advance.

Course correction: Review what’s covered at medicare.gov and estimate what your annual out-of-pocket healthcare liability might be. Contribute to a health savings account if your employer offers one. These provide the best tax advantages for savings that ultimately go to qualified medical expenses.

Assumption 3: I’ll be able to work as long as I want or need to.

Reality check: Many people end up retiring earlier than they planned. Sometimes the cause is an unexpected health issue or the need to care for an ill loved one. In other instances, a person loses a job and finds it hard to secure a new one with similar pay.

Course correction: Rerun your savings projections assuming early retirement and/or relatively low-wage work in retirement.  

Assumption 4: I should play it safe with my investments in retirement.

Reality check: While a conservative retiree’s portfolio might be 20 percent equities, and 80 percent cash and fixed income, a greater allocation to stocks can help offset the risk of outliving your savings.

Course correction: An analysis by the Schwab Center for Financial Research found that a retiree with a 60 percent allocation to stocks was able to take larger withdrawals than a retiree with 20 percent in stocks while still maintaining the same degree of confidence that their money would last.

A more aggressive portfolio isn’t right for everyone. A financial planner can help you weigh approaches that account for multiple rates of return and retirement scenarios.

We are not guaranteed safe financial passage throughout this life, but having options and the ability to modify your course is important. At Schwab, we can help you create a financial plan that is relevant, comprehensive, yet flexible.