Misconceptions about nest egg longevity may force retirees to rethink future
Consider this retirement plan:
You'll call it quits at 65 and start drawing full Social Security benefits. Without job-related expenses, you'll need only half your working income.
To supplement Social Security, you'll draw from your savings. You remember reading somewhere the average life expectancy for 65-year-olds is 17 more years for men and 20 for women. So, at most, your money needs to last 20 years. You can spend 10 percent of your savings the first year and a similar amount in future years because the rest of your money will continue to be invested and grow.
What's wrong with this plan?
Actually, just about everything.
I made up this "plan" to illustrate persistent misconceptions that can put many retirees at risk of running out of money, according to a follow-up "Retirement Income IQ" study conducted this year by the MetLife Mature Market Institute.
Basically, the study shows Americans continue to underestimate how long they may live and how much money they'll need in retirement, and to overestimate how much they can safely withdraw from their savings.
Scores this year were a bit higher than in an initial survey in 2003. But "there are still a lot of things people need to learn," said Sandra Timmermann, a nationally recognized gerontologist and director of the Institute, MetLife's think tank and research center on aging and the 50-plus market.
For the 2008 survey, conducted online by a research firm, 1,216 people ages 56-65 answered, on average, between six and seven out of 15 multiple-choice questions correctly. (Simply by guessing, they could have answered between three and four.)
"Most startling," Timmermann said, is that most people "don't really know how much to draw down from their savings" and many are way off in estimating retirement income needs.
The usual advice from financial planners, backed by research, is that to minimize the risk of running out of money, retirees should spend no more than 4 percent of their savings the first year of retirement, increasing the amount annually to counteract inflation.
In the MetLife study, 69 percent of people surveyed felt it was safe to spend more, including 43 percent who would spend at least 10 percent.
Almost half underestimated retirement income needs. Many financial planners suggest a benchmark of 80 percent to 90 percent of preretirement income. But 49 percent of those surveyed thought 50 percent or less was enough.
In addition, more than 1 in 4 incorrectly believed a 55-year-old today qualifies for unreduced Social Security benefits at 65 or younger (it is not until age 66).
The last time a person could begin receiving unreduced benefits upon turning 65 was in 2002.
In one bright spot, most people now understand that "longevity risk" - living so long as to outlive one's savings - is the greatest financial risk retirees have.
Humberto Cruz is a columnist For The South Florida Sun-sentinel. 