EIGHT MYTHS OF RETIREMENT Don't believe everything you hear about the finances of old age. Here are some time-honored retirement rules that ought to be retired.
By Lani Luciano

(MONEY Magazine) – Most conventional wisdom is harmless enough when it's wrong. So what if the early bird doesn't catch the worm? At least he'll catch the sunrise. But running your financial life on cliches can be hazardous, particularly when it comes to retirement. By the time you realize your plans were based on faulty assumptions, you may not be able to recover. The retirement years, unfortunately, come in for more than their share of falsehoods -- eight of the most dangerous of which are presented below. ''People make up these rules of thumb to guide themselves through an uncertain future; unfortunately, the rules are too often wrong,'' says Robert Preston, editor of the Preston Report, a bimonthly retirement-planning newsletter (57 North St., Danbury, Conn. 06810; $69 a year). Some of these myths were never true. Others once were, but demographic, economic or social changes have since made them obsolete. Either way, whether you are near or far from retiring, here are some misconceptions to avoid:

MYTH NO. 1: Most people need to save for no more than about 10 or 15 years of retirement. This myth rests on the fact that the average life span is 75 years and that most people retire by age 62. The average life span, however, takes into account the entire population, including the 21% who die before age 65. By the time you reach retirement age, your projected life expectancy is already well past that average. Yet even the best educated misunderstand these odds. When TIAA-CREF, the nation's largest teachers' pension fund, asked its members -- average age 61 -- how long they thought they would live, most undershot their probable longevity by six to eight years. Men figured they'd reach 78, but most will live to 84. Women thought they would see 80; 88 is more like it. That means these teachers will have to support themselves about a third longer than they thought they would -- and you may have to as well. Reality: You need to plan for age 90, at least.

MYTH NO. 2: If you stay with one employer your entire career, you'll have a richer retirement than if you job hop to chase higher salaries. It is true that if you change jobs a lot, vesting requirements may prevent you from building up much money in fixed pension plans. But you may still come out ahead. The reason is that even with the maximum number of years of service, fixed pensions usually offer a retirement benefit of no more than about 50% of the highest salary you reach before retiring. Thus if you stay in a job for decades just to build your pension but work for lower pay as a result, your benefit will be less. If you can raise your salary by changing employers more often, though, you will boost your benefit from any fixed plan that you happen to get vested in. Also, you will be able to contribute more to the increasingly popular self-funded retirement plans such as 401(k)s. They sometimes vest sooner than fixed plans and, in any case, let you take your money with you even if you leave before the company's payments are vested. ''While 5% more compensation can be enough to justify switching to a new job, depending on how other benefits stack up, 10% will almost certainly be worth your while,'' says Robert Ready, a benefits analyst with Hewitt Associates, a Chicago consulting firm. You must, of course, plow some of your extra income into a 401(k), Individual Retirement Account or other savings. Reality: You shouldn't stay in the wrong job for the right pension.

MYTH NO. 3: Preserving capital should be a retiree's main objective. Preserving spending power should be your objective. If you retire at 55 and live until 90, your retirement may last almost as long as your working years. That's enough time for inflation to erode even the fattest nest egg. A $500,000 retirement account earning 8% would yield a comfortable $40,000 a year. But assuming a modest inflation rate of 4.5%, the income would buy only $27,000 worth of goods in 10 years, $17,000 in 20 years and only $11,000 after 30 years. To stay ahead, your best strategy is to increase wealth in the early years by working part time (provided, of course, your added earnings don't cause an offsetting reduction in Social Security benefits) and by including growth investments in your portfolio. If you bank an extra $20,000 a year in your $500,000 retirement fund for the first 10 years, you will probably outrun inflation forever and never use up your money. Even if the consumer price index roars out of control, as it did in the 1970s, you will buy extra time. Later, when you are no longer willing or able to work, you will have more money that you can invest or dip into if necessary. Reality: You shouldn't stop earning and saving just because you are retired.

- MYTH NO. 4: You will pay a smaller fraction of your income in taxes. Sure, you may drop into a lower tax bracket the year after you retire, provided your income goes down far enough. But forget about brackets for a moment and concentrate instead on the effective tax rate -- that is, the actual fraction of your income the government claims. The effective tax rate has risen fairly consistently ever since individual income taxes were first levied in 1913. Even under tax reform, which cut the top bracket to just 33% in 1989, down from a recent peak of 70% in 1981, the effective rate held steady. ''Although a lot of people saw their tax brackets come down,'' explains Paul Murski, chief of research for the Tax Foundation, a Washington, D.C. public policy group, ''most of them lost deductions and exemptions under the new tax code and, meanwhile, their state and local taxes were going up.'' If the effective rate continues to rise in the future, as seems very likely, then you may pay as much or more of your income for federal, state and local taxes after retiring as you did while working. Furthermore, if your retirement includes part-time work, the taxes you pay for Social Security will almost certainly have risen to keep the system solvent. For the same reason, you can probably expect more of your benefits to be taxed. Reality: Even if your retirement income puts you in a lower bracket someday, you can't assume that a smaller percentage will go for taxes.

MYTH NO. 5: Your housing costs will go down. Even if you pay off a 30-year mortgage by the time you retire, inflation will have made it only an incidental expense. Your real costs will be property taxes and maintenance, which continue to rise. Since most retirees' incomes drop, people 65 and older actually spend a larger portion of their income on housing than those 45 to 64, according to the Bureau of Labor Statistics (31% for the older people vs. 27% for younger ones). Of course, you can reduce costs by buying a smaller house or renting, but it won't just happen by itself. Reality: If your house needs lots of maintenance and is in an area with high taxes, you should count on a rising housing budget -- or figure on moving.

MYTH NO. 6: Your retirement nest will be empty. If your adult offspring flock back, or if you or your spouse's elderly parents need care, you could find yourself retired in a house full of permanent guests instead. Since 1975, the number of young adults age 25 to 29 living with their parents has nearly doubled. Says Sheldon Goldenberg, a sociologist at Canada's University of Calgary who studies this trend: ''When kids need to save for a house, or their marriages fail, or they're simply scared to go out on their own, they rush back to Mom and Dad.'' Meanwhile, as people live longer, retirees increasingly become responsible for very old parents, many of whom need day-to-day care; an estimated 60% of dependent elderly live with their adult children. And even if your children or parents don't actually move in with you, they may still need your financial help -- which could have just as big an impact on your retirement plans. Reality: Unless you are a childless orphan, you may well face dilemmas about what support to give to the generations that preceded and succeeded you.

MYTH NO. 7: Your employer will provide good basic health insurance, and Medicare will cover the rest of your medical bills. Two developments are making it increasingly unlikely that your employer will offer future retirees anywhere near the kind of coverage that current retirees get. One is the annual double-digit rise in insurance premium costs; even well-heeled employers are having trouble swallowing that. The other is a change in federal accounting guidelines that discourages companies from making generous promises of future support to retirees. Under the change, such obligations reduce the profit a company can show on its balance sheet today -- thus cutting the all-important bottom line. Given these two influences, it's no wonder that a survey by Wyatt Co. -- a Washington, D.C. benefits consulting firm -- showed 38% of corporations planning to reduce health benefits for those retiring in the near future. The far future looks even worse. ''A worker currently at mid-career may get no health insurance at all when he retires,'' observes Harold Dankner, a partner with the accounting firm Coopers & Lybrand. As for Medicare, remember that you usually can't collect until age 65, even if you retire sooner. And on average, it will pay less than half of your health-care bills. Reality: You'd better take good care of yourself, put aside money for insurance and check into cost cutters such as health maintenance organizations.

MYTH NO. 8: Chances are good you will spend your last years in a nursing home, but long-term-care insurance can protect your wealth. First, your odds of winding up in a nursing home for more than short periods + of time are fairly small -- only about an 8% chance for women, 5% for men. True, that may become more likely as people live longer in the future, but it will probably still be a long shot. Unfortunately, if you do fall into the unlucky minority that requires long-term care (at an average annual cost of $25,000 to $30,000), nursing-home insurance may not preserve your nest egg. Virtually all such policies pay only a fixed daily benefit, and the cost of care has been rising 5.5% per annum. Even if you are willing to pay more over the years to raise the benefit, because medical costs have been increasing so much faster than inflation, in the end your insurance will probably only defray, not absorb, them. You may do just as well taking the money you would otherwise spend on premiums and investing it conservatively. That way, if you don't need long-term care, or if a government program comes along to bail you out, the money will still be yours. Reality: You shouldn't rush into nursing-home insurance unless frailty or Alzheimer's disease runs in your family.