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Planning for Your Retirement:
4 Common Retirement Blind Spots

We kid ourselves that the Retirement Fairy will rescue us. But the truth is, we're on our own. Here’s how to break free of the myths. By MP Dunleavey

Retirement planning is something most people put off for as long as possible -- and for good reason. It's terrifying. In reviewing my own retirement plans and those of the Women in Red (WIR) -- a grueling journey of hope and fear -- I discovered some gaping holes in our assumptions about how retirement works.

There are the great mysteries, of course, like compound interest and safe withdrawal rates. But this column is about some common blind spots to which we all fall prey at times. Although they seem small, they add up to a classic case of "what you don't know can really hurt you."

If any of this sounds familiar, it's time to wake up and recalculate exactly how you plan to finance the future:

Blind Spot I

Unfortunately, it has inspired everyone from policymakers to financial planners to imagine a world where we'll all be working until our teeth fall out.

Alas, I played along by making 70 the target retirement age for each of the WIR. (Some of us intend to work even longer -- Anna plans to work until she's 90 and live until 120).

There are some problems with the Eternal Work Plan:

According to Elise Gould, a labor economist at the Economic Policy Institute, many people stop or are forced to quit working long before so-called retirement age. Some people are wealthy enough to retire early voluntarily, Gould acknowledges, "but that's not true for the vast majority," she says.

Rather, health problems and other life events, like needing to care for an aging relative or spouse, often prevent people from working. "There's also the fact of age discrimination in the market," she adds.

Moment of clarity: You may indeed be hale and hearty enough to tote your own barge at 75 or 80 -- but don't use the Eternal Work Plan as an excuse for not saving now, while you still can. Rather, suggests Steven Sass, associate director of research at the Center for Retirement Research (CRR) at Boston College, "keep work as a contingency plan as you approach retirement. It can make a huge difference." If you're willing and able.

Blind Spot II

For the sake of simplicity, each of the retirement plans in the series was based on the assumption that each woman would start collecting the maximum benefits at age 70. The trouble is that, between rising Medicare premiums and taxes on benefits, those of us retiring in, say, 25 or 30 years will see a drastic cut in the after-tax value of Social Security benefits, according to a study by the CRR.

Right now, accounting for taxes and Medicare, Social Security benefits replace about 39% of the average wage earner's salary, says Sass. By 2030, that will drop to about 29%. "That's a huge, huge cut."

Moment of clarity: Financial planner Sharon Rich is among those who take a strong stand against including Social Security benefits in your retirement calculations at all. She recommends leaving them out entirely. "That way, if you get anything, it's gravy."

Blind Spot III

I realized this terrible misconception after we'd calculated the nest egg for two or three of the WIR, and each was predicted to yield something less than the woman's current income. That's not what most of us are hoping for, yet financially it's where we're headed.

Meaning: Unless you're starting very young, or saving more than 15% of your income, you'll be doing well to have more or less the same income, purchasing power and standard of living in retirement that you have right now.

So if you can't afford Caribbean cruises and trips to Europe now, don't expect the Retirement Fairy to buy your tickets when you're 65.

Lyndsey and Stephanie, as the young 'uns, are in the best shape to be able to increase their nest eggs because they have not yet reached their peak earning years.

They could end up saving far more than what we projected based on their current incomes of about $50,000 each.

Jill also has the potential to enjoy a better standard of living in retirement because she is a) very ambitious and b) works in a field that can provide high six-figure incomes -- which she's working hard to attain.

Moment of clarity: Unless you know your income will rise substantially, you have some reckoning to do -- and additional savings to sock away -- if you dream of a better quality of life in your golden years than you have now.

Blind Spot IV

If you were like me, you looked hard at your own parents and said, "Not bloody likely!

But even those of us not waiting for a fat inheritance might be tempted to hope that Mom or Dad's life insurance, condominium or secret hoard of gold might one day be added to our own coffers. And that's a temptation to be avoided.

In an article published by the Federal Reserve Board of Cleveland, "The Baby Boomers' Mega-Inheritance -- Myth or Reality?"economists Jagadeesh Gokhale and Laurence Kotlikoff list a few reasons why, Boomer or Gen-Xer, you shouldn't count on family money:

Your parents don't care. According to their data, "only 22% of households headed by someone over 65 expect to leave a sizeable bequest."

Your parents are spendthrifts. "Recent research shows that elderly Americans' propensity to consume out of their resources has risen dramatically since 1960."

Your parents may remarry. Wealthy parents might remarry late in life and dash your plans to inherit. In case your brain needs jogging, I have three words for you: Anna Nicole Smith.

The odds are against you. According to the authors' calculations, only 1.6% of heirs will get $100,000 or more.

Moment of clarity: You're on your own, kid.

SOURCE: MSNMONEY.COM