Three retirement myths

INEXTRICABLY LINKED: RISK AND INVESTMENT PLANNING

Saving more, working longer and changing your risk-planning approach can change your retirement - Brad Toerien. Moneyweb

Though often regarded separately, in many respects risk- and investment planning have the same objective: protecting your income. “We view risk planning as protecting you from the risks that prevent you from being able to earn an income, allowing you to create the wealth that you need. Investment planning is around helping you grow that wealth so that one day you can replace the income when you no longer need/ want to work,” says FMI CEO Brad Toerien.

However, both are driven by conventional wisdom, which in many cases is no longer true.

Myth 1: You’ll earn a continuous, steadily-increasing income stream until retirement

“The reality is obviously far from that,” says Toerien. According to FMI’s claim statistics, seven out of 10 people will have at least one injury or illness in their working lives that’ll prevent them from earning an income, at least temporarily.

Worse, if it’s happened once, it’s likely to happen again.

Even where investors have a rainy-day fund that can provide income for two or three months, it’s often only enough to support them during the first temporary injury or illness. Moreover, temporary disability or income interruptions can have long-term or permanent consequences.

He says protecting your income isn’t enough. You must choose the right cover and ensure you can protect 100% of your income at every point.

Investors must choose the shortest available waiting period. If they have to wait 60 days for the money, they’ll likely miss payments and credit records might be affected.

Myth 2: You know how much you’ll need to retire

Toerien says this is often driven by two rules of thumb – that investors need 75% of their final salary as a retirement income and that 20 times that amount is a sufficient lump sum to invest at retirement.

But the 75% replacement ratio likely won’t be enough where retirees still have debt/dependents. Healthcare costs and medical inflation also add up.

Investors must save more, work longer or accept they’ll need to live on less in retirement, he says.

He suggests a way to save more is by using a life insurance product providing monthly income and lump sum benefits for temporary/long-term disability or critical illness.

Myth 3: You’ll retire at 65 and live until 90

In reality, people retire at 65. Yet, life expectancy has increased significantly since the retirement concept was introduced.

While only a small percentage of us can afford to maintain our standard of living if we retire at 65, this hasn’t been built into financial planning yet, says Toerien.

“We have to start using the reality as we know it today to inform the decisions we are making today.”

People are living longer. “Retiring at 65 is no longer realistic. Planning your finances around dying at 90 also does not make sense anymore.”