3 Myths That Will Ruin Your Retirement Security
Americans aren’t saving enough for retirement, and many people will have lives that last much longer than their money. While I’m not blaming the following myths for people saving so little, individuals don’t need any more reasons, or dumb financial advice, that encourages them to put off saving for retirement any longer.
Here are three widespread myths that contribute to people ignoring the steps needed to secure their retirements.
1) Once you retire you will spend less.
I hate to break it to you, this one is only true if you are forced into it being true. Would you rather plan ahead and have fun frolicking on the beach, or taking cooking classes in Italy, like the retirees who appear in retirement advertisements? Or would you prefer sitting on your front porch and watching the only entertainment you can afford: cars driving down the street.
Let’s be real for a minute. If you have nothing to do all day, do you think you will spend more or less? I’ll guess that most people will probably spend MORE. All those trips cost money. Do you stop having friends or a social life? Doubtful. Also, the cost of basic goods you buy will increase over time.
Additionally, many people forget to factor in medical care into their retirement plans, assuming they have a retirement plan at all. Fidelity has estimated the cost of healthcare over a 20-year span for a 65-year-old couple who is retiring NOW to be about $280,000. Remember, this does not include things like nursing homes or long-term care. You may say, “I’m in great health. I could never spend that much.” Surprisingly, healthy people often end up spending more, mostly because they live longer. The last super fun point is that Fidelity estimate of $280,000 is for a couple retiring today. If you will be retiring in a few years, or a few decades, you can expect that number to be higher, perhaps much higher. If you are approaching the age of 65 seem and eager to sign up for Medicare, don’t expect your spending to drop in retirement even if you are the epitome of perfect health.
You may be able to cut back a bit when you first retire, but inflation will probably make those savings hard to maintain. I’m not even talking about the vacations, and travel, you want to take in your golden years. European cruise anyone? Inflation may be an issue for many older seniors as we continue to live longer and longer.
2) You can afford to live off Social Security alone.
I’ve often heard, “I’ve qualified for Social Security, so I’m all set.” I’m guessing that many people haven’t looked closely at their Social Security estimates to see and understand what they will actually be getting from Social Security. Some people assume Social Security will be enough to live off in retirement, and with that in mind, they don’t need to save anything else.
Sadly, Social Security is really only designed to cover around 40% of a person’s pre-retirement income. With so many Americans already living paycheck-to-paycheck, I think it’s fair to assume most of us would really be struggling if our incomes were cut by 60%. I hate to pour more salt in this wound but there are many estimates that say medical costs will eat up at least half of many peoples’ Social Security checks, leaving them with roughly 20% of their pre-retirement incomes. Say it with me. OUCH!
Here’s an example. If you were taking home $10,000 per month and then suddenly only received $4,000, would you be able to pay your bills? Some may be able to get by for a while, others may not last a month.
3) You won’t owe taxes in retirement.
I’ll give you a half right if you think your tax situation may be different in retirement, or if you are one of the people who are planning on living off just a small Social Security check, you might not end up owing any income taxes. But in reality, most of us are going to owe some amount of tax in retirement.
Do you have an IRA, 401(k) or another retirement account? Many common sources of retirement income happen to be taxable. Pensions, IRA withdrawals and 401(k) withdrawals will all be taxed as ordinary income.
There is enough misinformation floating around the internet to drown a whale. Even with good information and advice, many peoples’ heads spin just thinking about retirement planning. Don’t take the approach of the ostrich, and just stick your head in the proverbial sand. Be proactive. Get your financial house in order and on track for your various financial goals. Maybe even go a step further, and work with a fiduciary financial planner.
Source: David Rae of Forbes.com