All credit cards are bad. It’s better to own than rent. Cash is king. There’s no such thing as good debt (or bad, for that matter).
We’ve all no doubt heard some of these financial myths at some point or another, and the sad part is that we’ll go on believing them. They tend to get perpetuated ad infinitum by people we trust, like friends, family, and colleagues, so we may tend to take their word for it. Plus, every good myth always has that little element of truth in it that makes it hard to question its validity.
Retirement planning myths may be some of the most persistent and pervasive, and they can create the worst outcome for our finances. By the time you might discover and disprove the myths, it might be too late to approach things differently, and you’ve wasted years that you can’t get back to save up and make up for lost time.
Thankfully, "It’s too late to start planning for retirement" is just one misconception that needs debunking. Here are some other myths to be aware of if you want to retire with money in the bank:
Myth #1: You need $1 million (or more) to retire.
Everyone would love to be a millionaire, but that’s exactly what you’ll need to be if you want to retire comfortably. Or so we’re led to believe. Some financial experts (David Weliver of Money Under 30, for one) even maintain $2 million as a more realistic retirement number to reach for. The thinking? Anything less may not be enough of an egg to nest in once you’ve called it a career.
The reason this is more myth than fact is because there’s no one-size-fits-all approach to retirement goal setting. If you’re aiming for a cool million, go for it. But don’t feel obligated to choose between reaching seven figures or die trying (without retiring). A more reasonable method is the popular notion of needing 70 to 80 percent of your pre-retirement income to live on, so while that may be $10 million for one person, you may be able to live comfortably off $50,000 a year; it all depends on your lifestyle and where you see yourself in the years to come. You might need 60 percent, or 50 -- or even 35 percent, as some sources suggest, after major debts, like a mortgage, are paid off.
The key is to budget, project and predict how much you’ll need if you have a decade or three left before retiring; making use of a good retirement calculator will help. The idea is to live comfortably within your means and feel like a million bucks in retirement, not feel pressured to have it in the bank.
Myth #2: You won’t need to pay taxes in retirement.
Not needing to pay taxes in retirement is like the ultimate senior citizen discount. Think about how much further you’d be able to take your money if you didn’t owe the IRS a dime of your hard earned/saved cash. It’s not clear where anyone got this thinking from, but this myth could originate from the idea that once you’ve ceased earning income, you have no more income tax to pay.
Like all good myths, that’s not entirely false, since you technically won’t have to pay nearly as much income tax as you did before -- but you’ll still need to pay some taxes. There is no retirement tax exemption or case where you’ll owe zero taxes -- not as long as you’re still on this earth with a Social Security number to your name. Once you’ve stopped earning a taxable paycheck, many retirees may change their income tax deduction status and claim fewer dependents, resulting in paying more taxes come filing time. Depending on where you live as a retiree, you may pay more in property taxes or other costs. By remaining mindful ahead of time of the taxes you’ll need to pay, like distributions from a retirement account (i.e. 401(k) or IRA), or ways to avoid tax penalties from those accounts (like making quarterly estimated payments), you can offset the taxes you pay.
Myth #3: You’ll be set with Medicare 100 percent.
Retirees lucky enough to be in good health post-65 years old may find that Medicare suits their healthcare needs. But don’t rely on the myth that it’s the only outlet you’ll need to pay for medical bills and other health expenses that come with aging. (Just as it’s unwise to believe that health issues won’t happen until later in life.)
While Medicare can provide you with some essential coverage, it actually won’t compensate the costs of several medical services; many eye exam-related expenses aren’t covered, nor is most dental work, and others, like dentures, hearing aids and podiatry aren’t in the scope of what Medicare pays for. In cases where Medicare does cover your costs, you may be hit with a 20 percent coinsurance cost that may be hard for seniors on a fixed income to cover.
Don’t let this discourage you from signing up for Medicare if you’re over 65. Where Medicare may fail to cover certain medical expenses, supplemental plans, like Medigap, or this one from AARP, can help cover copays, deductibles and other budget-unfriendly fees not covered by your existing policy.
A new presidential administration in place could also bode poorly for the future of Medicare. President Trump has indicated a major overhaul of the system within the next six to eight months -- most likely the requirement of premium payments for Medicare.
Knowing all of this well in advance of your retirement years can help you research for the right supplemental health insurance policy that covers all your future needs.
Myth #4: Your 401(k) will be sufficient for most of your retirement savings.
There was a time that you enrolled in your employer’s retirement plan, and when you retired, you got a nice severance package, a shiny gold watch and access to your 401(k) savings, with the assumption that it will have yielded enough retirement savings to live on, a superior competitor to the traditional pension plan.
That may have been the de facto way of doing things 30 years ago, but the reliability of the 401(k) has become more of a myth with the passing years. The fact is that 401(k)s may be becoming outmoded, with an unstable gains structure, expensive fees, and unwieldy tax implications that may reduce your total earnings. Whether retirement is years ahead or just around the corner for you, consider other investment options, like annuities, brokerage accounts or contributing the maximum to a Roth IRA in addition to the employer-sponsored account you may currently have. Above all, choose investment products that keep up with the rate of inflation so you won’t run out of money in retirement.
Myth #5: Social Security should be enough to live on.
Another myth that could affect your retirement years is believing that Social Security should be enough money to survive on, especially if you haven’t invested or saved any money elsewhere.
With uncertainty over the future of Social Security in the current White House cabinet, and an increasing strain on the system by aging Baby Boomers, a more prudent approach is to think of Social Security as an insufficient means of covering your retirement living expenses on its own. Like your 401(k), don’t put all your eggs in one basket; diversifying your savings, nest egg and emergency funds with other investment vehicles is a smart way to generate post-retirement income that doesn’t rely on one source alone.
To further maximize your benefits, you could try anything from declaring tax deductions on the Social Security benefits you receive, holding off claiming your benefits, or working until your full retirement age of 66 or 67.
Myth #6: I can work as long as I want to/I can retire when I want to/I’ll retire when I die.
At the risk of sounding morbid, approach working with these beliefs, and you may just end up working yourself to an early grave. It’s easy to decide when you’re young, fit and able that you’ll live and work until 75 with the same energy as a 30-year-old, but if there’s anything that can’t be further from the truth on this list, make it be this.
Four in 10 Americans begin withdrawing their Social Security benefits earlier than the official retirement age. Ignoring those numbers and assuming that you’ll work as long as you like is not only a myth, but a naive one at that. According to statistics from the Employee Benefit Research Institute, more than 60 percent of U.S. workers exit the workforce due to injury or illness.
Hope for the best and expect the worst; embrace the prospect of a long, illustrious and lucrative career, but remember that changes in employment due to layoffs or industry changes, or unexpected medical bills or other major costs could force you to retire early and deplete your finances. Take the steps now to bolster your savings surplus and create a financial buffer whether you retire at 65 or 105.
We recommend one way to brace your finances for some of these possibilities is to seek a long-term disability insurance plan for income and asset protection. The policy will replace your income if an injury, illness or disability prevents you from working and earning money. It also protects your assets that you may deplete to cover living expenses without insurance coverage in place.
Myth #7: Retirement means that life is over.
The opposite of myth number 6 but a myth all the same, it’s easy to resign yourself to thinking that retirement will be a phase of life where you’ll be broke, homeless, ill and, worst of all, never able to work ever again.
Less a myth and more a downright lie, retirement couldn’t be further from the truth. Retiring may be the legitimate end of your full-time working career; embrace it. But think of all the additional ways you can still stay engaged even when you’ve stopped working. You might consider taking on a part-time position or side hustle to earn some supplemental cash. Give your entrepreneurial side some consideration and pursue consulting for income. Turn a hobby or passion into a paid venture, like selling arts and crafts. Become an Uber driver, look for paid volunteer positions -- the opportunities are endless.
But just like the past is the past, these retirement scenarios are in the future, and the only way to shape the outcome is to make the most out of the present.
By finding ways to improve your financial status now, living within your means, increasing your savings and securing the insurance coverage you need, the steps you take today will ensure a better tomorrow in retirement.