Retirees spend much less, and other money myths

Fretting is the new normal for retirement.

We haven't saved enough, too many of us retire without financial security, and we may need to work longer to achieve it - assuming we can hang on to our jobs or find new ones. No wonder that workers and retirees are more pessimistic about their future prospects than they've been in years.

The outlook shouldn't remain that glum if the economy keeps improving. But it's critical to understand how retirement has changed.

Here's a look at some retiree money myths and the facts behind them:

No. Medicare covers a portion of your medical expenses once you turn 65, but far from all of them. The program was designed to pay for major health-care needs, not routine dental or eye care, many prescription drugs, and home-health or nursing-home care.

Retirees should consider purchasing a Medicare Supplement (Medigap) policy for roughly $200 a month to fill in the gaps. And pre-retirees should consider buying long-term-care insurance in their 50s or early 60s.

Not likely. The amount you spend in retirement can rise due to travel, hobbies, and other leisure activities in the initial years of retirement.

About half of retirees surveyed by the Employee Benefit Research Institute in Washington said they spend as much or more in the early years of retirement than before they retired.

Because retirement spending habits vary so widely, many financial advisers frown on the traditional rule of thumb that you need 70 percent to 80 percent of your preretirement income to maintain your lifestyle. To be safe, they say, you should plan on needing 100 percent.

Perhaps not. Bonds aren't a great place to stash cash for the long haul. And their outlook has soured lately.

Many investment advisers recommend seeking more income by investing instead in companies with a history of increasing their dividends, such as Pitney Bowes or Clorox. A list of the 42 large-cap companies that have increased dividend payments for at least 25 years - the so-called Dividend Aristocrats within the Standard & Poor's 500 - can be found here.

Think again. The fear that Social Security will disappear is overblown. Although some fixes need to be made, you shouldn't worry about losing this linchpin to retirement security.

The worst-case scenario probably is a reduction in benefits starting a quarter-century or so from now. And it can be avoided if Congress raises the retirement age or taxes on high-income earners, which are among the measures under consideration.

That depends. This isn't the automatic scenario it might seem to be. Federal income tax rates, low by historical standards, are likely to increase as the government addresses its $14 trillion debt. And states are suffering similarly. Many are expected to follow the lead of Illinois, which raised its income tax rate this year from 3 percent to 5 percent.

The combination of income from Social Security, pensions, 401(k)s, IRAs, and taxable investments may leave you in the same bracket or a higher one.