Most people believe that they’re on the right track with their personal finances and retirement planning. But often, they don’t know what they don’t know. Misconceptions can negatively impact how you prepare and save for the future and blind spots can undermine your financial security.
Myth #1: I won’t need as much money when I retire as when I was working.
In fact, people often spend more in retirement than they do working, particularly in the first few years.
When you retire, you will have more free time for travel, leisure activities, hobbies, and other things you might like to do during your retirement years.
The general rule of thumb says that you will need approximately 70% of your pre-retirement income in order to maintain a lifestyle similar to that which you currently have. If you are saving 30% of your income today, then living off 70% in retirement may make perfect sense for you. But if you tend to spend most of what you bring home, or you don’t expect to own your home by the time you retire, you may need up to 100% of your pre-retirement income to maintain your standard of living.
In addition, medical expenses will likely continue to increase at a faster rate than they did during your pre-retirement years.
Myth #2: My tax bill will be lower in retirement.
Many retirees assume that they’ll fall into a lower tax bracket once they retire because they’ll be living on less income. This assumption could be incorrect for a number of reasons.
First, you may need just as much income in retirement as you did before retirement in order to keep your standard of living. Additionally, you may qualify for fewer deductions than in previous years. If you pay off your home before retirement, that deduction is gone—and don’t forget that the withdrawals from your tax deferred investments, such as your Traditional IRA or 401(k) will be taxed, too.
It’s also very difficult to predict what tax rates will be in the coming decades.
Myth #3: Medicare will take care of my health insurance.
Qualifying for Medicare doesn’t mean that your health care costs will be covered.
In fact, your health will probably be your biggest future expense. Medicare doesn’t cover deductibles and copayments, out-of-pocket expenses for prescriptions and visits to specialists, or other expenses, like dental visits, hearing aids and eyeglasses.
People often assume that if they have to go into a nursing home, Medicare will cover them, but most of the time that’s not true. And if it does, it will only cover you for up to 100 days.
Myth #4: Social Security will provide enough income for my retirement years.
The fact is that Social Security accounts for only about 38% of the average retiree’s income.
Your must have a plan to accumulate your own funds to make up for the gap between your Social Security benefits and your living expenses during retirement. Social Security should be considered a supplemental benefit to your retirement financial planning and not the foundation.
Myth #5: Investing all of my retirement money in my 401(k) is always the best option.
Just as it’s important to diversify investments, it’s important to diversify tax strategies. If all of your money is in a [traditional] 401(k) or IRA, every time you need income, it’s going to be taxed.
But if you have some money in a 401(k) (or other tax deferred accounts such as a 403(b) or Traditional IRA), some in a Roth IRA and some in a brokerage account or mutual fund, then you’ve got a tremendous amount of flexibility in how you pull income—and you can save in taxes by having a diversified approach.
Make sure that you discuss your specific situation with a qualified tax advisors prior to following any rules of thumb or advice that you read from this source, or any other.
Myth #6: I can just keep working if I don’t have enough money to retire.
Thanks to longer life spans, it’s certainly more likely that you’ll work past the traditional retirement age of 65. But counting on employment as the best way to fund your golden years is not a wise plan.
If fact, health problems and disabilities are the most common cause of early retirements. Plus, you might find yourself out of a job years ahead of schedule due to downsizing or changes in the economy—not to mention the possibility that your field might not even exist in the future.
Myth #7: Only rich people or those who are nearing retirement need a financial plan.
Financial planning is for everyone. Regardless of your level of income or assets, you need to plan for the future. You can have ideas or goals, but unless they are written down, revisited and adjusted on a continuous basis, it is unlikely that they will happen. With a plan in place, you may be surprised by how much easier it becomes to reach your goals.
And it is never too soon to begin planning for your retirement. Time is one of the most powerful tools in the accumulation of wealth. The sooner you start to accumulate assets and plan for your retirement years, the less you will need to set aside each year in order to achieve the same objective.
Some people have the patience, and time, to educate themselves on how to plan their own finances, but most don’t. Working with a financial planner could make a significant difference in how successful you are in reaching your life, legacy and retirement goals.
This article was originally published on GOGIRL Finance. More by GOGIRL Finance on Levo: