Exposing the Truth Behind Popular Retirement Misconceptions
By, Jeremy Reif, CRPS
With the never-ending stream of retirement advice being thrown at you, how do you know which answer is correct? Different sources will tell you different things, like when you should claim Social Security, what type of account you should use, and how much you should be saving each month. It’s hard enough to create and adhere to retirement planning strategies, let alone do it with incorrect information. Take a look at these four common retirement myths to beware of so you can plan your retirement with confidence.
Myths #1: You Can Wait A Few More Years Until You Start Saving For Retirement
When you’re in your 20s, it’s easy to push saving for retirement to the back burner while you pay off student loans, buy a car, have fun with friends, or save for a house. While it’s tempting to wait until later in your career to start investing, that could bite you later.
The earlier that you can get into the habit of saving for retirement, the better off you will be in the future, all because of the magic of compound interest. Compound interest helps the money you put away grow faster due to interest building upon itself. It means that not only do you earn interest on your principal, but on the interest you’ve already earned as well, so you are earning interest on interest.
Many of us prioritize paying off the mortgage or helping the kids with college costs over saving for retirement, but with life expectancy increasing, your principal may not be enough to carry you through your retirement years. You need as much growth as possible, and the earlier you start saving, the more time your money has to grow. For example, if you start saving $400 per month at age 25, you would have $1 million saved by age 65 (assuming a hypothetical 7% annual investment return). If you don’t start until age 35, you’ll have to save around twice as much to reach $1 million by age 65. Even if it’s a small amount, start saving as early and often as you can and give yourself a leg up on your future retirement.
Myths #2: Your Company Or The Government Will Take Care Of Your Retirement
In the past, retirement income was commonly compared to a three-legged stool;[1] one part came from Social Security, another from company pensions, and a third part was from personal retirement savings.
Unfortunately, times have changed. Company pensions are far less common than they were in the past, replaced by a hybrid model of pensions and personal savings called defined contribution plans. At the same time, funds for the Social Security program have been steadily dwindling and your Social Security benefit is only designed to replace about 40% of pre-retirement income.[2] What was a three-legged stool for previous generations is now a somewhat wobbly two-legged stool.
In fact, Social Security trust funds have been running a surplus since 1982. Right now, the surpluses are predicted to stop in 2020 and the system will rely on incoming interest payments to make up the deficit until 2035. At that point, if no changes are made, benefit payments may shrink to 80% of what Americans expect.[3] That means that in order to achieve the retirement of your dreams, you will have to work to develop strategies that maximize the potential of your other assets.
Your Social Security benefit may be a nice supplement to have, but it shouldn’t be counted as the only piece of your retirement income.
Myths #3: Medicare Will Meet All Your Healthcare Needs
Medicare may likely be one part of your healthcare coverage, and for some people, it may meet the majority of their needs. But many older retirees suffer from serious medical conditions and Medicare may not provide the comprehensive coverage they need. For example, you may have to pay some prescription costs on your own, pay premiums and coinsurance expenses, or pay out-of-pocket for care that isn’t covered, such as long-term care in a nursing home.
The money to cover these costs will need to come from somewhere, such as long-term care insurance, a health savings account, or your personal savings, possibly affecting how long your money will last in retirement.
Each of these options, and even Medicare itself, comes at a cost to you. You should consult with a certified Medicare broker with questions about the costs that you may incur and what your best Medicare options are.
Myths #4: Retirement Means You No Longer Have To Work
You might be scratching your head after reading that sentence. For most people, that’s exactly what retirement is, a goodbye to their working years and a hello to full-time leisure. Unfortunately, while it may be your goal to stop working altogether in retirement, that may not happen. The retirement landscape has changed and the golden years don’t always look like the model many of us envision.
To bridge the retirement income gap, many retirees chose to phase their retirement, gradually leaving the workforce by working part-time or remotely. Some take this milestone as an opportunity to pursue a second career, start a business, or find part-time work to make money on the side.
That’s not the only reason retirees are returning to the workforce, either. With longer life expectancies, some retirees are even finding that they may spend nearly as much time in retirement as they did in their careers. For some of them, their ideal retirement is about striking a balance between work and leisure.
Don’t Let These Myths Derail Your Retirement
These are just a few of the many myths that can lead you astray about what to expect in retirement. Being informed could make all the difference for your retirement years. At Point Wealth Management, we can help you find the information you need to make the best decisions on your path to retirement.
[1] https://www.investopedia.com/ask/answers/09/three-legged-stool-retirement.asp
[2] https://www.fool.com/retirement/2018/10/22/25-jaw-dropping-stats-about-social-security.aspx
[3]https://www.cbsnews.com/news/when-will-medicare-social-security-run-out-of-money-to-pay-all-obligations/