With varying information out there in regards to retirement, I would like to present to you 20 myths about retirement for your reading enjoyment.
1. Paying your house off is a must.
If you are someone who has fallen for this myth, ask yourself why you think it is important to pay off your house first. If it is because you would “feel” better if you paid it off, that is your first mistake. It is better to look at the numbers and make a decision based on those numbers instead of how you “feel”.
2. It does not matter how you take social security.
Deciding when to claim social security will have a permanent impact on the benefit you receive. Claiming before full retirement age can significantly reduce your benefit (up to 30% less) while delaying increases it (by as much as 32%).
3. All I need is $1,000,000.
For some people, one million is enough. This is not the case for everyone, especially as cost of living increases every year. One million today is not the same as one million dollars 10 to 20 years from now. Better to have a specific plan written for your specific situation.
4. I can use the 4% rule and be okay.
First question: 4% of what? Is it in cash, diversified mutual funds, or ETFs? Higher initial withdrawal rates or overly conservative portfolios can put your retirement at risk. However, setting your spending at retirement too low and not adjusting along the way may require unnecessary lifestyle sacrifices in retirement. Consider a dynamic approach that adjusts over time to more effectively use your retirement savings.
5. I will spend less money when I retire.
According to the Bureau of Labor Statistics, health care has had the second highest inflation (5%) only behind education (5.2%) from 1982 to 2015. So while you may be spending less in education and on your mortgage, health care expenses will almost certainty be more in the future.
6. My tax bracket will be lower in the future.
I’m glad you know the future of what congress is going to do. The fact is that congress controls tax rates. They can choose to raise or lower them. People also mistakenly think that they will have less income (because of less expenses (see #5 on this)) in retirement. While this may be the case for some, this is not the case for all.
7. I’m going to put all my money in CDs and Bonds.
This is a protection strategy. Lets put some #’s to it. Say you buy into myth #3 and #4. You retire with one million dollars and you take a 4% withdrawal strategy in the kind of portfolio in myth #7. In a typical market you will run out of money in approximately 26 years. Where a heavy bond portfolio (20/80 split) will last 30 years +. This is assuming again that you will only take 4%, which as you see in myth #4, that is not likely.
8. College savings comes before retirement savings.
Your kids can get loans for college. There are no loans for retirement. Enough said.
9. Medicare is all I need in retirement.
Medicare does not cover long-term care past 100 days. According to Genworth, the average cost of nursing home care (private room) is $91,250 a year. This is an example of why Medicare is not all you need.
10. I only need to live off of my money for 10 years.
Well I guess that all depends on when you retire. If you are one of the Americans that is likely to retire at age 65, then you are very likely to live longer then 10 years. According to the Social Security Administration, if you make it to 65, you have over a 50% chance that you will make it to age 80. For women, you are 50% likely to make it to 85. If you are a couple, there is a 47% chance that one of you will make it to age 90.
11. I can keep working forever.
Who are you superman? Lets me real here, your body will eventually break down. Thinking that you are going to able to work forever is just not working in the realms of reality. According to the Employee Benefit Research Center, 67% of current workers expect to work past 65. However, of actual retirees, only 23% actually work past retirement. The #1 reason why they don’t work: Health problems (60%).
12. I’ll just plan on that inheritance
Like in the answer for #6, you do not know how congress is going to handle estate taxes. Also you do not know if your family is going to require long term care (which can drain accounts fast). Also unless you know the details of the estate plan of the inheritance, it is possible that you are not getting as much as you expect. All factors to consider.
13. You need 80% of your income in retirement.
80% of what income? Now? When you were 40? There is a couple of things that are not being considered in this. First and foremost is FICA. If you are a W2 employee, you are likely paying FICA. That is something you do not have to worry about in retirement. What about savings that you are putting away? How do you account for higher medical expenses in retirement? All of these are not figured into this general figure.
14. Retirement means not working.
Retirement does not mean not working, it means not having to work. You have that option. Where as, before retirement, you did not.
15. All I need is a will to cover my assets.
When it comes to estate planning, your goal is to make it as smooth as possible for your heirs. Probate is the court that handles estate matters and it is expensive. Wills still go through probate. While other types of estate documents have ways to get around probate and therefore save a lot of money and heartache for your relatives. A good estate attorney should be able to explain this to you for no charge.
16. Don’t ever touch your principal.
My question is why? You saved all that money for retirement to not use it? It is ideal that you leave as much in savings as possible for the unforeseen events. But it is not a hard and fast rule that you do not touch the principal.
17. You’re too young to start paying for long-term care.
Long term care is one of the biggest expenses you could see in retirement. Again referring to #9, the average cost of a nursing home stay is around 90k. It is not a risk that you should assume. Starting as early as possible to mitigate the risk is ideal,
18. Having a 401k is enough.
Although having a 401k is good (better then some), it should not be your only strategy. One big reason is taxes. A 401k is tax deferred. Which means that when you retire, you have to pay income taxes on everything you withdraw. Diversification does not just mean investments, but also means tax diversification.
19. It’s too early to save for retirement.
It is never to early. Consider this scenario. Jim puts 10k away annually from age 25 to 35. Susan puts 10k away annually from age 35 to 65. Assuming a 6.5% rate of return, who do you think has more money at age 65? Jim does (951k vs 920k). Yet Jim only put away 100k while Susan put away 300k. That is the power of time and compound interest.
20. It’s too late to save for retirement
It’s never to late. If you feel you are behind (or even ahead for that matter), I would meet with a us to see what your options are. You may be surprised what we come up with. We have access to many strategies that can help bring you to retirement.