Retirement myths are commonly shared misconceptions that we have heard so often; we believe they are true. You will do your golden years a disservice if you make your retirement planning with them in mind. Here are 12 retirement myths you shouldn’t believe:
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12 Retirement Myths You Shouldn’t Believe
Myth #1 – It’s essential to clear all your debt before you retire
Not necessarily. It is more important to pay off bad debt. Bad debt is debt such as higher interest credit cards, car loans, pretty much anything that will depreciate over time. Often it comes from living beyond your means. Use a smart budget to make sure your spending is in line with your retirement income.
Good debt builds wealth over time. It includes mortgages, home equity used to make improvements, and student loan debt (yours, not your children’s) taken to complete a degree. More homeowners age seventy and older than ever now have mortgages. Fixed-rate mortgage borrowers benefit from receiving a tax break through the mortgage interest deduction if they itemize. The deduction amount does vary, depending on when the home was purchased.
Are you looking for tips on managing your debt in retirement? See our blog post on the Reality of Managing Debt in Retirement.
Myth #2 – If you run short of money in retirement, you can always get a job
Keep in mind half of all retirees retire early due to poor health or illness. Age discrimination and health problems can also make it impossible for some retirees to work. Only a tiny percentage of people who thought they would work part-time in retirement do. According to the Employee Benefit Research Institute (EBRI), in 2019, although 80% of retirees thought they would work in retirement, only 29% did. The EBRI also discovered that retirees left the workforce earlier than expected due to downsizing at work, caring for a family member, and changes in job requirements and technology. The average retirement age in 2019 was 64.
Myth #3 – Life Insurance is a necessity in retirement
The purpose of life insurance is to help people when you are gone. It can be used to pay off debts and funeral costs. However, don’t waste your money on insurance if no one needs this assistance after you die. If your death won’t cause a financial hardship for anyone, life insurance is unnecessary. The ideal candidates are families with children under 18 and couples with only one income earner. Many younger people opt for affordable term life insurance, with the choice of renewing or canceling after 20 years. At that point, it may no longer be needed.
Myth #4 – You should take Social Security payments as soon as you’re eligible
You can claim Social Security benefits anytime between age 62 and age 70. However, unless you need them earlier due to the inability to work or lack other income, you should wait. The amount you receive increases the closer you get to your official Social Security Administration retirement age. If you were born in 1960 or later, your official retirement age for Social Security is age 67. This is when you can collect the total amount you are due. This amount does increase until age 70. Curious about what your official retirement age is? Try the SSA Calculator.
Myth #5 – A 401(k) plan is a perfect place to take a loan or withdrawal while still working
Your 401(k) is not a piggy bank. Borrowing from yourself at a low interest rate seems like a great idea but in reality, is risky. You should only withdraw from your 401(k) before retirement in dire situations. If you leave your job for any reason, you have to pay back the balance within two months. Otherwise, you will have to pay a 10 percent tax penalty. Plus, if you withdraw the funds, they aren’t growing for retirement.
Myth #6 – Saving for your children’s college expenses is more important than saving for retirement
In a perfect world, everyone would be able to fund their kids’ college education fully. Unfortunately, the rising cost of college has made this near impossible. Realize that while your child can get a college loan, you cannot get a loan for retirement. Consider using a 529 educational account to save for education automatically. Ideally, you should save for both, with an emphasis on your retirement.
Myth #7 – By the time you’re 50, it’s too late to make a substantial difference in your retirement savings
Is age 50 too old to start investing? No, it’s never too late! There are strategies for saving for retirement as a late starter. The first step is to make a plan, preferably with a certified financial planner. Starting at age 50, the IRS allows you to make catch-up contributions to retirement plans. In 2021 an individual can contribute up to an additional $6,500, with a maximum 401(k) limit of $19,500. Be sure to consult your financial advisor or accountant to make certain catch-up contributions are allowed for your income and situation. Click HERE to see the IRS information on changes for 2021.
A temporary part-time job or side gig can help you earn some extra retirement savings. Just make sure you put any money earned towards your nest egg and don’t spend it. Remember, your goal is to build wealth for retirement to make sure you have enough money. Also, examine your expenses to see if you can put additional cash in your savings accounts, retirement funds, or emergency fund. Are you looking for ideas to cut your costs? 16 Ways to Cut Your Monthly Expenses offers more tips.
Myth #8 – You only need to save five times your salary to retire comfortably
This magical number changes, depending on your myth source. The critical point is many Americans underestimate what they will need to save for retirement. Your retirement savings include 401(k)s, pensions (if applicable), Social Security benefits, and savings accounts. The recommended amount is about ten years’ worth of income by age 60. The more significant part of this math equation is what your expenses are. Use a budget to figure out how much money you will need. Keep in mind the type of lifestyle you want to live, accounting for inflation and unknown expenses. If you plan to travel, dine out frequently, or enjoy more recreational activities and hobbies, for example, you may need more income. If you are traveling abroad as a retiree you want to avoid money mishaps. Assisting adult children financially is another significant (and often unexpected) expense that many retirees take on.
Myth #9 – You can withdraw __% from your savings each year in retirement
The percent you can withdraw from savings is another magical number that changes according to the source. The amount you can safely use depends on the amount you have saved and your needs. Experts recommend taking 4% of your retirement savings the first year and adjust it for inflation in subsequent years. This way, hopefully, retirees have enough to live on in their retirement and won’t run out of funds. However, it comes back to careful saving and retirement planning.
Myth #10 – You will live in one place throughout retirement
The idea that your housing is secure for all of your retirement is comforting. However, the reality is moving is often a big part of retirement. Even if your mortgage is paid off, you may decide to move closer to family members or leave the suburbs for the city to be closer to public transportation, restaurants, and cultural activities. Neighborhoods change! Yours may no longer meet your lifestyle needs. Changes in your health and mobility may make it necessary to move to a condo or an assisted living facility. Check rent affordability of any new locations that you are thinking of moving to.
Myth #11 – Healthcare costs won’t be an issue in retirement
Healthcare costs are a big issue for retirees and the rest of America. Medical expenses have risen over the past few years and will most likely continue to grow. It is tough to determine what people will have to pay for healthcare in retirement, even with Medicare and supplements. Medicare offers good coverage for doctor visits and hospitalizations but does not cover most long-term care. Extended nursing home stays, assisted living, and many types of home health care are not included in many cases. It is recommended that an average couple of retirement age save $265,000 for healthcare costs alone.
Myth #12 – My taxes and expenses will be less in retirement
If you plan on traveling, visiting family, and starting new hobbies you never had time for, you might spend more in retirement than you thought. That’s why it’s essential to treat each of these things as a line item in your retirement budget. You have worked hard and deserve to have some fun. Just plan for it!
You will pay less in taxes only if you have less income. Don’t forget that you may get fewer tax breaks if your mortgage is paid and you are no longer paying for college for the kiddos. Your real estate taxes may rise if property values grow in your community. If your income is the same in retirement as working, you may not end up in a lower tax bracket than you expected.
Final Thoughts on 12 Retirement Myths You Shouldn’t Believe
The 12 Retirement Myths above are just a few of the myths I’ve heard. My advice is to educate yourself about personal finance from good sources like Dividend Power and the sources listed below. Make a retirement budget and consult a financial planner to help keep you on track. Retirement planning takes time and effort but is worth it if you can live comfortably in your golden years, even with unexpected expenses.
Thanks for reading 12 Retirement Myths You Shouldn’t Believe!
You can also read 16 Ways to Cut Your Monthly Expenses by the same author.
Some of my favorite free financial resources for seniors online are:
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Christine Seaver is a freelance writer that writes about personal finance, budgeting, and debt. She is a frequent contributor at Dividendpower.org. Christine works as an office manager by day and a cookie baker at night. She lives in Massachusetts with her family.