While many people may think their financial and retirement planning is on track, they can be unaware of potential misconceptions or blind spots. These oversights could have a detrimental effect on how you prepare for your future and erode the security of your finances. It’s critical to monitor these areas closely before it’s too late!
Through my work with clients, I often discover widespread misconceptions about retirement savings. Here are a few of the most common ones that I hear:
Myth #1: My financial needs will be much less when I enter retirement.
Believe it or not, retirees often spend more than they did when employed! Retirement brings about plenty of freedom for adventure and pursuits such as travel, hobbies, leisure activities, and the like. With these newfound opportunities to enjoy life in your retirement years come extra expenses – but certainly well worth their cost.
Ponder to yourself: “When am I more likely to spend money?” Is it when you’re at work or during a day off? In retirement, your days will be much closer in resemblance to the weekend than Monday.
As a general rule of thumb, you will require approximately 70% of your pre-retirement income to sustain the life you are accustomed to. However, if most of what you earn is spent on living expenses or if you don’t anticipate owning property by retirement age, up to 100% could be necessary in order for your quality of life not to deteriorate. If today’s savings rate accounts for 30%, then depending on individual circumstances this may be sufficient post-retirement once more factors are taken into consideration.
Furthermore, it is likely that medical expenses will accelerate at an even higher rate than before your retirement.
Myth #2: Avoiding an unnecessary tax burden has never been easier; when I retire, my taxes will be significantly reduced.
Retirees are often under the impression they’ll experience a lower tax burden post-retirement thanks to their smaller income, yet this assumption may be erroneous for any number of reasons.
It is vital to consider that your income in retirement may be similar to the amount you had before retiring, as it will help maintain your lifestyle. Additionally, there could potentially be fewer deductions to qualify for than previously. If you pay off your house prior to retirement, this deduction would no longer exist- and don’t forget withdrawals from any tax-deferred investments like a 401(k) or Traditional IRA would also raise taxes!
Forecasting future tax rates is a formidable task, as they can be highly unpredictable.
Myth #3: Medicare will provide my healthcare coverage, ensuring I am well-protected medically.
While qualifying for Medicare is a great step in the right direction, it doesn’t necessarily mean that your healthcare costs will be taken care of. Your medical expenses may very well be your biggest future expenditure; deductibles and copayments aren’t covered by Medicare, nor are out-of-pocket charges associated with prescriptions or specialist visits. Furthermore, other services such as dental appointments, hearing aids, and eyeglasses won’t typically fall under the umbrella of coverage either.
It is a common misconception that Medicare will cover long-term nursing home stays, yet the reality is it typically won’t. Furthermore, should you receive coverage from Medicare for your stay in a nursing home, this will only last up to 100 days at most.
Myth #4: Social Security will be a reliable source of income that allows me to retire with peace of mind.
It’s essential to remember that Social Security provides only 38% of the average retiree’s income. Therefore, it is imperative to have a plan in place for accumulating your own funds to make up for any discrepancies between living expenses and benefits during retirement. Rather than relying solely on Social Security as the basis of one’s financial planning, you should consider it an extra benefit or perk!
Myth #5: Allocating all of my retirement funds to a 401(k) plan is always the recommended approach.
Investing in multiple accounts is not only a wise way to diversify your money but also an effective strategy to maximize your tax savings. When all of your funds are stored in just one [traditional] 401(k) or IRA account and you need income, it will be taxed heavily. However, if you split up the investments with some of the money going towards a 401(k), Roth IRA, and mutual fund/brokerage account combination; then you would gain tremendous flexibility when drawing out earnings as well as enjoy significant tax reduction benefits.
Before trusting any rules of thumb or following advice you read in this source, it is essential to speak with an experienced tax advisor that understands your unique situation.
Myth #6: If I don’t have the finances to retire, continuing to work is a viable option.
With life expectancy on the rise, it’s become commonplace to work past 65. However, relying solely on employment as a means of providing for your golden years is dangerous and ill-advised. For instance, health issues and disabilities can unexpectedly force you into early retirement – not to mention potential job loss due to downsizing or economic shifts which could leave your field obsolete in time! Don’t let yourself be caught unaware; plan ahead now so that you’re prepared if the unexpected happens later.
Myth #7: Only rich people or those who are nearing retirement need a financial plan.
It is essential for everyone to plan ahead financially, no matter what their current level of income and assets are. Thoughts and ambitions may be present in the mind, but unless written down or regularly examined and modified, it’s improbable that they will materialize. By creating a financial blueprint for yourself, you just might find yourself getting even closer to achieving these goals than you ever imagined!
Now’s the ideal time to begin getting ready for retirement—time is money after all! The earlier you start accumulating wealth and planning your golden years, the less of a financial burden each year will be. This way, you’ll still reach your goals without having to set aside as much each year.
For some, setting aside the diligence and resources to teach themselves about personal finance is possible. But for many of us, that’s simply not feasible – this is where a financial planner comes in handy! Working with an expert can make all the difference when it comes to achieving your life goals or even leaving behind a legacy. With their assistance, you could reach retirement objectives sooner than expected.
This article was originally published on GOGIRL Finance. More by GOGIRL Finance on Levo:
Life after college can be overwhelming, but it's also full of opportunities. Here are the most important lessons Levo has learned so far.
Discover essential tips for going on vacation alone, ensuring a safe and enjoyable solo vacation adventure for female travelers.
If you're considering a move, these 10 questions to ask new employer can help you determine if the role is right for you.