When it comes to retirement, there is no shortage of conventional wisdom on everything from the ideal age to retire and the idea that Medicare and Social Security will take care of you in your golden years.
Some of these myths, however, are simply wrong. If you’ve gone through the years following these retirement myths, it’s important that you read this.
“I can wait a few more years to start saving for retirement.”
In your twenties, it’s easy to put off your retirement savings and wait until later in your career to start investing. Getting a new car, having fun with friends, paying off school loans or saving for a house tends to take priority. While this mentality is understandable, it’s not a valid excuse to delay saving. The earlier you can get into the habit of saving for retirement, the better off you will be because your money can compound and grow.
“Social Security and my company will take care of me.”
Another important myth to debunk is the mindset that your company or the government will care for you in retirement. Retirement used to be viewed as a three-legged stool consisting of Social Security, company pensions and personal savings. But things have changed with pension availability declining and the possibility of Social Security funds dwindling. According to the Social Security Administration’s 2016 summary of annual reports, the Social Security trust fund is expected to be depleted in 2034.3 Unless Congress enacts reforms, you will have to be sure that your other assets make up for the less-than-ideal benefit you may receive from Social Security.
“Medicare will cover my health expenses.”
The Employee Benefit Research Institute reports that only 13 percent of all private sector employers offer retiree medical benefits. Count yourself lucky if you’re one of the few that have this sort of coverage, but for many Americans, they have to find a way to deal with increasing health insurance premiums. But what about Medicare, you might ask? You may not be able to rely on Medicare to pay your medical bills. In a study by Hewitt Associates, they found that health care expenses can cost retirees 20 percent of their annual income. This percentage will grow even more over time as Medicare’s fiscal problems continue. The best thing you can do is plan for medical expenses in retirement and consider options like supplemental medical insurance or long-term care insurance that might help protect your finances down the road.
“You need 70-80 percent of pre-retirement income in retirement.”
A popular myth is that you will only need 70-80 percent of your pre-retirement income in retirement. The truth is, estimating how much you will need is entirely unique to each person – there’s no specific percentage that covers everyone. Oversimplified rules like this tend to do more harm than good. According to the Employee Benefit Research Institute, 52 percent of retirees spent more than their pre- retirement income during retirement. Considering that many retirees ditch their working lifestyle to pursue a more active, expensive lifestyle, this makes sense. Ultimately, no one knows exactly what future inflation will be, or how many health care issues or expenses you will face someday, so rules like this don’t work. A better idea is to get a rough idea of how much you will need in retirement and make a budget that is based on your unique situation and perform various “tests” based on various inflation and potential costs.
“Invest safely to lower risk and preserve capital.”
Many people wrongly assume that when it comes to investing, all they need are bonds and Certificates of Deposit (CDs). Back in the day, it was fine to invest conservatively because life expectancies were different and inflation was relatively mild. However, this may not be the best strategy in today’s environment. Today’s retirees have to plan for a 30+ year time horizon that factors in inflation. You have to not only preserve your capital, but also grow it to preserve your purchasing power. Having some of your assets invested in stock to help add a growth component to your portfolio isn’t a bad move – it can help offset inflation. While there’s no safe way to protect your portfolio from inflation, there are alternatives that can help counter inflation while protecting your capital.
“Retirement means not having to work.”
Retirement has changed over the years and doesn’t always follow the traditional, "full-time work becomes full-time leisure" idea. In order to make up the retirement income gap, many people are either gradually leaving the workforce, choosing second careers, or doing part-time work. Whether they decide to work because they need that sort of fulfillment or need additional finances, the added income helps.
“Retirement begins at 65 years old.”
Traditional pensions and Social Security used to pay out at sixty-five, but this doesn’t necessarily apply anymore. Retirement no longer has a specific age, some retire in their thirties, some never retire – it is unique to the individual. Having the right retirement plan is of the utmost importance, and you don’t want to jeopardize it. If you’ve fallen prey to any of these retirement myths, it’s not too late to get back on track.