Episode 529 – Retirement Misconceptions

Welcome to the Your Life Your Wealth podcast with John Walker and Jason O’Meara, helping you find clarity and comfort for your life and wealth.

John Walker:
Hey, welcome to the Your Life Your Wealth podcast. I’m John Walker, Regional Vice President at Mercer Advisors. Always a pleasure to be with you and to be joined by my great co-host and colleague here at Mercer, certified financial planner™ and Market Leader, Mr. Jason O’Meara. Thanks for joining me, Jay.

And as I thought about what we’d talk about today, I’ve had the privilege of meeting a lot of new families in my role here, right? I get the privilege of hearing their stories and seeing what they’re looking for in a partnership and certainly telling ours. But I’ve had a lot of folks that we’ve met with that maybe it’s their first time thinking about working with a financial planner, right? And it’s their first experience of going through the financial planning process. And there’s a lot of misconceptions out there around what we do.

What influences financial planning, and a lot of fear that drives a lot of the decision-making that families take as they approach retirement, as they think about their financial future. So, I thought we’d take some time, Jason, to talk about some of the most common misconceptions that we see as planners here.

And I think it doesn’t matter what year it is, doesn’t matter what’s going on in the world. The one that I hear the most, and I’m sure that you’ve heard the most, is that Social Security won’t be there for me.

Jason O’Meara:
Yeah, honestly, John, if I had a dollar for every time I heard that, we’d be retired ourselves, right? I mean, yeah, honestly, like, and I’m not just going to dismiss people’s fears here. It’s certainly in the news on a fairly regular basis, right? And it’s definitely something that is used to kind of fear monger. And let’s be honest, it’s not that it hasn’t changed, right? It’s not that Social Security hasn’t had different iterations and payments and other things over the years.

John Walker:
But it’s something that we’ve been hearing for decades, that Social Security is going to run out of money and your benefits will be different and you won’t have it where previous generations did.

Jason O’Meara:
Even right now, right, we’re being super pessimistic about this, right? And I keep hearing in 2032, Social Security is going to be gone. Nobody will get any benefits. The reality of it is, even right now the way things are set up, they’ll still cover roughly 80% of your benefit, right, assuming no changes are made. That’s a kiss of death from a politician’s standpoint to ruin Social Security. Like, you know, they’re going to make changes, even if it’s something as simple as — John, you and I, our full retirement age is probably going to be later than 67.

Right, they’ll probably make changes for those of us who aren’t at the point of collecting or anytime soon. But if you’re within 10 years of Social Security, I’m sorry, but that’s the demographic that shows up and votes the most.

John Walker:
Correct. You’ve heard me say this to so many families, and I preface it by saying, this will sound really cynical, but Social Security has absolutely enormous political support across the entire spectrum. Doesn’t matter what party you align with. It is wildly popular, and I cynically don’t think that there’s a lot of political capital behind having this program run out of money, right? It’s projected to face a funding shortfall. It’s still taking payroll taxes in every year.

And we’ve just seen historically, Congress has, like many things, messed around with this program. It’ll almost certainly do it again, but there are solutions available. So, I think what’s more likely for us to expect is either a change in benefits, whether it is, like you said, a change in full retirement age, a lower benefit amount, or higher taxes, right? It’ll likely be some combination of all of those things, right? But the idea that it will completely go away seems like a fear that’s extreme and rather unlikely.

And so when we do planning, we still model in that Social Security and some sort of benefit, if you’re eligible for it, will exist for you. But what I think is helpful is that we can also show people, well, what if it is a 20% reduction from what the estimate says you should receive as your benefit? Can your plan sustain that? And that allows families to see, even if there is a reduction in benefits, I can come up with a strategy potentially to adjust for this, particularly if you have a little time.

Jason O’Meara:
Right, right, and listen, I get the human element of it — the hey, I paid into this system expecting a certain amount to come back to me, and now it’s going to be less. But at the same time, I mean, listen, things happen, you know, there’s always going to be some level of change. At the end of the day we have to prepare for it and be, you know, what’s that, hope for the best, prepare for the worst kind of situation, where with the plan if we can sit there and show that 80% of your expected Social Security, you are still completely financially independent, then we’re good. Then you’re good. Then yeah, it stinks. It sucks. We can complain about it, but ultimately we can’t throw the baby out with the bathwater and say this is not going to be here. We just need to say it’s going to look a little different.

John Walker:
I understand, like you, the reservations and the fear, but it is something that, again, we can plan for. One of the other things that we hear quite a bit, Jason, and it’s probably a couple of misconceptions maybe woven into one, and it’s generally around long-term care. And it has some version of, I don’t need a plan because I’m going to stay in my home as long as I can. And even if I need it, Medicaid will cover my costs, right? Medicaid will provide me the benefits. So this idea that long-term care is not something that you need to plan for because the family will take care of me or I’m going to stay in my home — it’s a misjudgment and it can really, really unhinge a plan. The best plans can be unhinged in very short order.

Jason O’Meara:
Yeah, and it’s completely different, right, than having a couple of years in the market, right, because the market could possibly return. If you don’t have a long-term care plan and you actually need long-term care, that’s not money you’re going to get back, right? So that’s money that gets spent, right? The average stay in long-term care is 3 years, right? But that’s an average. If you have something like Alzheimer’s or dementia, that could be 10 years, right, at a very high cost.

So, it’s really something that kind of needs to get worked into everybody’s plan. And again, another hope for the best, prepare for the worst. Long-term care is one of those things that we just said can dismantle your plan in ways that are not recoverable. And what could be worse is spouse A requires long-term care, passes away, and spouse B has another 10–15 years of life left at this point with a considerably smaller pile of money. So not only do you owe it to yourself — cause everybody wants to get good care — you owe it to your spouse to make sure that you’re protected. Or if you want to leave a legacy to your kids, you need to make sure that that legacy is protected.

And there’s inexpensive ways to plan around long-term care. Different types of insurance products out there. And it’s important to work with somebody who isn’t earning a commission on those products to help you see through them, which ones make sense, which ones don’t. Cause there’s a lot of moving parts with that. But to sit there and ultimately say, I don’t care cause Medicaid will pay for it — you have to drastically spend down your assets in order for Medicaid to kick in. You know, spend down. There is some planning around certain types of trust, but there’s lookbacks, and when are you going to do it, right? When are you going to kick your assets out of your estate, right, or out of your name and into an irrevocable trust? You gotta do it early because there’s lookbacks, so you can’t wait until you need it to do it because it’s too late at that point.

John Walker:
Yeah, I mean, there’s so much on this, you know, Jason. The idea that you’ll stay at home — it might be reasonable for some people if you do need support. The median home health aide cost in America right now is $75,000 per year. That’s the median. So that needs to be modeled into your plan if you’re going to need some support. And for many folks, after their health deteriorates to a certain level, their care needs intensify and those costs increase, or the ability, whether it’s mobility issues or other issues, to actually physically stay in the home becomes not only cost-prohibitive, it becomes unsafe, right?

And so, the Center for Retirement Research estimates that 80% of retirees will require some form of long-term care. That means you need to prepare, right? The idea that you’re going to — I wouldn’t take those odds, right? If it’s an 80/20 split, I’m going to need support versus not, I’m going to plan for the 80, right? That’s the most likely outcome. And without a plan — and a plan does not need insurance, a plan means having a strategy for how you are going to fund this — without that, as you said, Jason, a lot of families are forced to really draw down their savings, put their long-term prospects in jeopardy. And you want to be the one making your decisions, right?

I think we talk to a lot of families, Jason, about preferences and control and having choice, right? Because the Medicaid fallback plan for some families, that’s the best pathway. But as you said, you have to have a very low income and your assets need to be nearly depleted in many states for Medicaid to be even something you’re eligible for, right? And a lot of folks struggle with what is covered by Medicaid, right? Your options are often severely limited if you go down that route.

Jason O’Meara:
So it’s expensive. That’s the problem, right? It’s expensive. Genworth did a study back in 2024, and it said the median annual national cost for a private room in a nursing home is $128,000. And that’s national, right? We’re predominantly, we record this in the Northeast. It is more expensive here than it is elsewhere in the country. So, if you’re in this general area, you’re probably expecting to see a higher cost there. Even a semi-private room is like $70,000 a year, you know, and that was up 10% from the prior year. So, I mean, to one thing we know for sure is that healthcare cost is going to become more expensive going into the future. It’s going to go at a higher rate than the regular inflation numbers that you’re used to seeing on the news.

So, this is something that we’re spending a little bit more time on because every time I hear that, oh, I’m good, I don’t need to worry about that — oh, I cringe. I cringe because I’m like, no, you do need to think about this. You need to have a plan. You may be able to self-insure, but you need to know that. You know, and by self-insure, I mean use your own money instead of an insurance product. But you need to know that for sure.

John Walker:
Kind of dovetails into another one we hear a lot, Jason. When we build out financial plans for families, we model out their lifetimes to 95, 100, even longer depending on the family history. And we get all the time like, well, I don’t have that long of a run, right? Like, ah, long term is not really the thing right now. Listen, if you retire at 65, statistically, you’re quite likely to live 25, 30, 35 years, right? That is long term. 25, 30 years is a long term.

It is a plan and you need a long-term strategy. So, we get all the time and it kind of goes with the, you know, how am I going to fund these things? Can I self-fund this? You do still need a long-term investment strategy, right? You still do have a long-term plan. And listen, we certainly can’t predict how long anyone’s going to live, right? We sometimes joke, hey, you give me the end date, I can get all the math right.

Jason O’Meara:
Yeah, it’s really easy at that point.

John Walker:
The math gets easier when you have all the variables, but you just mentioned inflation and the rising cost of medical expenses. It’s universal, right? A dollar today is not going to be worth what it is in 10 years, 20 years, 30 years, right? There is inflation. It’s normal. It’s why we laugh when my parents talk about penny candy actually being a penny, right? And so, what can you buy for a penny today? Very, very, very, very little.

Jason O’Meara:
Right? That’s why they don’t make them anymore.

John Walker:
They don’t even make them anymore, right? So, if you aren’t planning and aren’t looking at this horizon of decades, then you’re really selling yourself short, right? So, this idea that you don’t need to have a long-term investment approach anymore or you can abandon stocks in favor of cash or bonds, maybe, but you are going to need some level of growth to maintain the value of your dollars, right?

Jason O’Meara:
Yeah, I think that’s one of the biggest misconceptions when we meet with new families is, uh, I’m at retirement, so I’m done. This was the finish line, and the reality — no, it’s not. It’s more of a triathlon, right? Like, all right, you’ve done the swimming part, now you’re on the bike, you know, you’ve got to change. We’re just changing approaches a little bit here.

But you know, if we look at statistically large numbers, right, so the math, right, it says the likelihood that both people will be alive at 95 right now is like 5%, right? So that’s both, but the likelihood that one of you will be alive at 95 is 38%, right? And that’s a large number, so individuals, individual returns will vary, but the reality of it comes down to just because you’re at retirement doesn’t mean the race is won. It just means you’re on the next leg of the race. So you need to maybe adjust the investment plan, but you still need a good 30-year time horizon, 25-year time horizon, right?

And with that comes needing to have equities. I always tell people we need to backfill what you’re taking out. There’s no better conversation that I have with the families I work with than saying, hey, we took out x number of, you know, a dollar amount out of your account and your account still went up, yeah, right? That’s a good feeling. That’s when you feel financially independent — when taking money out of your account doesn’t cause your accounts to go down in that year.

John Walker:
Yeah, and it’s not going to happen every year. It’s not going to always be predictable, but you do need — we are certainly proponents of well-diversified portfolios that create the appropriate expected returns at the appropriate level of risk, right? So, your allocation certainly needs to align, but this idea that you can just abandon any risk is really a dangerous one. You actually, in the interest of trying to reduce your risks, you’re probably making the likelihood of success for your plan more risky, right? And that’s the idea of the right balance there.

It kind of comes into the other thing that we see, Jason, and this is both an emotional and it’s almost a visceral reaction, which is a lot of the retirees or pre-retirees we meet want to plan that says they believe they shouldn’t spend from their principal, right? It kind of goes to this idea of getting a little more conservative with age and they want to live off of the interest and dividends and other things that their investments can produce, and the reality is it’s not typically feasible for a lot of folks, and it’s not really what your retirement accounts are for.

Jason O’Meara:
Right, right, yeah, I was just doing an event where that was the first question. I’m in retirement now. All I want is, I don’t want to touch your principal. I want to live off my dividends. Unfortunately, interest rates have worked — it’s really difficult to generate enough dividend and interest without taking an absurd amount of risk, right, to generate this dividend and interest, right? If we want predictable, repeatable returns, and if you listen to this podcast more than once, you’ve heard me say that — you need to have other asset classes, not just dividend-bearing equities. It’s OK to tilt towards that, but it can’t be all you’re looking at, right?

The reality of it is, far too often we talk about that mental shift from earning an income to retirement, and what I find the hardest shift for people to make is that shift from, I’m not allowed to touch this money to now I have to touch this money. You know, you spent the last 40 years working being told, don’t touch that, that’s your nest egg, leave it alone. And now I’m sitting across from you for the first time telling you, no, we have to touch that. We have to take money out of that. It’s OK to take principal. We’re looking at total return. It’s OK to take principal.

John Walker:
Yeah. Yeah, Jason, I mean that account that you have diligently saved and invested, its purpose is actually to fund your retirement, and it’s very difficult emotionally to see balances go down, especially if you’ve spent your whole life trying to make them go up. But the reality is, a lot of families that are committed to this idea of living off of their dividends and income to cover expenses, they’re really unnecessarily frugal, right? They’re not enjoying their best possible life because of this emotional obstacle that they’re trying to overcome.

So, it is certainly emotionally driven. It’s often fear-based. It’s often not rational, but a good plan will allow you to see the sustainability even if you’re touching principal, right? And that’s what we spend a lot of time overcoming with families — to show them that they can still go into their principal, but it is going to provide them the retirement lifestyle that they’d like.

Jason O’Meara:
Right? And if you’re listening to this and you’re sitting there and you’re just retiring or you’re very close to retiring, you’re sitting there thinking, that’s exactly how I feel — please note, everybody feels that way. That’s a common thread that runs through everybody who’s making that transition to retirement, right? But after — I hate to say it takes this long because sometimes people are quicker, sometimes slower — but after a little bit of time of pulling money out of your account and watching the market return that money, you’ll realize pretty quickly like, OK, this is safe, this happens, this is good.

The bright side of having the ability to have that backfill work is that there’s going to be down years in the market and you can’t put your retirement on hold because the Dow’s down, right? So we want to build this, we want to keep building that cushion in there so that when the market goes down, you can still pull money out and feel pretty comfortable doing so.

John Walker:
That’s right. We have to control what we can control. The interest rate environment has not been sustainable for many families to live off of dividends and interest based on what they have saved. There are lots of different ways to approach this and making sure that your plan is sustainable is the key. That’s the objective, right? And so we want to make sure that you can spend thoughtfully without running out of money. That’s what good planning can help you do.

Jason, one of the biggest things that is a drag on that is taxes. Many families have been preparing for retirement. They have believed and assumed that when they stopped working, the tax burden will drop, right?

Jason O’Meara:
Right, right, and yeah, I mean, probably the biggest reason is the biggest nest egg that I see people come to us with is their 401k or their IRA, right, traditional retirement accounts. And just so you know, you’ve got a tax deduction when you put the money in, right? You pay tax on every penny when you’re taking that money out. So, you very well could see yourself in the same position where your tax bracket is either the same or higher.

If you have a large nest egg in a 401k or an IRA, you know, once you have to start taking money out — the required minimum distributions that start in your early to mid-seventies — you might find yourself in a situation where once you couple that with Social Security, you’re in the same tax bracket you were in when you were working.

John Walker:
Yeah, and a lot of folks haven’t planned for that, right? You thought that your W-2 income, your 1099, however you’re paid, that income went away. And so, since you’d be drawing down off of retirement, the idea, the math, right? What you’ve been sold on the contributions to your 401(k)s and IRAs is that you put it in at a higher tax bracket, when you remove it, it’ll be a lower tax bracket.

But what we are seeing more and more is that those assets have grown substantially. And for families at required minimum distribution age, the required distributions are often more than they need or certainly more than they anticipated. And those taxes can be significant, right? You might even be in a higher tax bracket than you were when you were working. And so, planning for that, right? Actually, doing strategic tax planning around how do we either reduce your taxable liability — we could certainly talk about how you can do that. That’s where things like Roth conversions and other planning strategies can play a part.

But the key is to do those, to make decisions and put a plan together early, right? Either before retirement or early in retirement before some of those higher potential tax liabilities with required minimum distributions, etc., kick in.

Jason O’Meara:
Right, right. And yeah, not only plan early, plan often, right? If you retire well before your required minimum distribution ages and your income is low in those years, we may be able to do things like Roth conversions or just spending out of the IRA to lower the future taxes. That’s a whole conversation around retirement, controlling your taxes in retirement and taking advantages of the accounts that are available to you.

That’s a very personalized plan, so we can’t give you advice on this podcast on what you should do personally because everyone’s tax picture is different. Everyone’s savings allocation is different. So, it’s something that you should absolutely be thinking about. There are options for you out there. It’s just a matter of which ones work for you to try to limit taxes in the future.

John Walker:
Yeah, and sometimes it’s not even about just reducing the total tax exposure, Jason, sometimes it’s simply just about smoothing out the ride, right? Making it a little more reliable and predictable so that you don’t have a big change down the line, right? A big surprise that you didn’t see coming and a major shift in what your tax liability is. Sometimes it’s just about creating a smoother glide path, right?

And so, understanding the objective, but recognizing that one of the ways that you can preserve wealth for your family is to reduce the liability that you have for taxes, right? We say to families all the time, it’s not always what you make, it’s what you keep, right? We kind of all know this intuitively. It’s really great to have market returns. It’s really great to do all of these things, but what’s meaningful to your balance sheet is how much you actually preserve, right?

And so, again, thinking through that and having a strategy around mitigating your tax risk can be really, really important. I guess, Jason, the last one that thankfully is a pet peeve of you and I, honestly, we have this — we both complain about this exact thing.

Jason O’Meara:
That is true.

John Walker:
And I will say I don’t know if it’s a shift in the landscape, if it’s just a shift in marketing materials, but we used to see it a lot. I feel like we used to see it a lot more, and that was this idea that I gotta hit this number before I can retire. And we still hear it. Thankfully I hear it a little less, and this is absolutely a pet peeve of both of ours, as you said, which is because I ask people all the time, and I think it’s a really important part of planning in general — why? Help me understand why. Why do you think you need $1 million, $5 million, $10 million, whatever that number is, right?

Because that target, which maybe serves you well in helping stay on job, visualize, stay committed to a savings plan, stay diligent with your investment approach, right? Stay disciplined — that I think can be very helpful, right? Having a target certainly and an objective is helpful with a plan. But it can also be really, really misleading and not always as helpful as you think.

Jason O’Meara:
Yes, I’ve had conversations with people where they said, oh, I would love to retire now, but I haven’t hit my retirement goal. And, regardless of the fact that I show them numerous times over — you, that retirement goal isn’t real. Here’s where you’re at, and here’s the lifestyle you can have with the amount of money you have. And it’s always the same thing. It’s kind of like ingrained in them. It’s inception, right? That’s the little kernel of an idea got put in your head and they can’t shake it.

The reality of it is, once we know what you’re looking to spend, what your budget is — I hate the word budget — but once we know what your spending is, we can then back into how much you need for retirement, and most of the time it’s less than what people think.

John Walker:
Yeah, yeah, I mean it’s entirely predicated on how much you spend and what sources of income you have, right? And no two plans are created equally. So, if you are going to have full Social Security benefits and a pension, you may not need as much in retirement accounts if those meet your spending goals. But if you have very significant spending goals, a million dollars may not be nearly enough, right? So, there is no “what’s my number,” right? There’s no specific number to retire.

It’s what do you want your spending needs to look like? What are your spending needs going to be? What does this actually look like for you? How do we create that? If your spending is $50,000 a year, and you get $35,000 a year from Social Security and have a $40,000 a year pension, your retirement accounts don’t need to be as big as someone who has a $100,000 a year spending goal and no pension, right? And so it is unique to you, but you really need to shift the focus away from a number. The number will reveal itself once we understand what you spend and what income sources you have, right? And it’s going to be different. It is not, by this age I should have X amount saved, right? There is no one way to do this.

Jason O’Meara:
And also you got to factor in things like what’s been your average return, right? How are you allocated? Where is your money sitting? Somebody with all their money sitting in a traditional IRA is going to have a different outlook than somebody who has some in a traditional IRA, some in a Roth, some in a brokerage account, right? Other places you could tax-effect and take money out in a more tax-efficient manner, right? So, it’s one of those things where it’s just a rule of thumb. And we know our opinion here. Rule of thumbs are lazy.

It’s one of those things…we have to do the work because we can sit there and say, oh, you need $2 million, but that’s if you retire at this age. What if you retire five years later than that? You might not need as much. Or what if you need to retire earlier for whatever reason? You might need more, you know. So, to put yourself on pace for this dollar amount just to me doesn’t make sense because it opens you up to potential missed savings or missed opportunity. So, it’s important to really work a plan and stay in that plan and keep going every year and review and make sure that you’re on pace because that number will change over time.

John Walker:
It certainly will. And what we talk about, Jason, as planners — all of these misconceptions, the common thread running through all of them is fear. Yes, right? It’s fear of running out of money, fear of losing benefits, fear of making the wrong choice. And naturally, sometimes fear drives people to being overly cautious, right? Or not necessarily evaluating all of the factors in their decision, right? That fear drives maybe an emotional decision that’s not grounded in math and grounded in fear of running out or making a mistake — prevents you from maybe doing things that you would really enjoy, like retiring a little earlier or being able to spend your assets in a different way, or gifts, or being charitable, or whatever it looks like for your family.

So, you know, I think it’s really critical if you’ve not gone through the financial planning process, if you aren’t familiar with what a plan can do, it really can help get you get the fundamentals right, right? Don’t let perfect get in the way of good, right? There is no perfect plan. There’s far too many variables for us to anticipate and so many that we cannot control, right? We cannot control what happens globally. We can’t control what the markets do. We can’t control if there’s going to be a war. We can’t control if there’s going to be this. There’s so many things that are outside the scope of your control, but what you can do is plan. Have an idea of how that will impact you, model it in, see the potential impact.

And hopefully, we say to families all the time, Jason, our real primary responsibility is to provide guidance and information so that they’re equipped to make the best decisions for their families. And I think that’s really the key — bringing ideas and thoughts and other perspectives to the conversation is really, really one of the most valuable things that a good financial plan can do. Jason O’Meara, certified financial planner™ and market leader here at Mercer Advisors, thanks so much for helping me talk through some of these really common misconceptions we see out there.

Jason O’Meara:
Of course, yeah, we hear them all the time. It makes sense. Let’s start taking these things down.

John Walker:
Absolutely, absolutely. And so if you have questions about what Jason and I discussed, if you’re feeling this way, as Jason said, if you’re approaching some of these decisions and don’t really know how to get to the right conclusion for your family — we’re always here to help. Feel free to email us anytime at jomeara@merceradvisors.com or me at jwalker@merceradvisors.com. We love to hear from you and we’re always here to help. I’m John Walker, Regional Vice President of Mercer Advisors. Thanks so much for listening to the Your Life Your Wealth podcast. Talk to you next time.

Announcer:
If you’re interested in learning more about applying the principles we discussed to your personal financial circumstances, please visit merceradvisors.com.

This presentation by Mercer Global Advisors Incorporated, also known as Mercer Advisors, was intended for general information purposes only. No portion of the presentation serves as the receipt of or as a substitute for personalized investment advice from Mercer Advisors. All expressions of opinion reflect the judgment of the speaker as of the date of recording and are subject to change.