John J. Diak, CFP®
Debunking 7 Common Retirement Myths
With a few exceptions, we all hope to retire one day, so most of us are striving toward a common goal. With everyone dreaming about and planning for a time when they no longer have to work for a living, it’s not surprising that you’ll find a lot of overgeneralized advice and conflicting ideas out there about what retirement means and how to best prepare. This often leads to misconceptions.
Let’s examine some of the most common retirement myths to clear up confusion and dispel potentially harmful misconceptions.
1. It’s Too Late to Start Planning and Saving for Retirement
It’s true that the best time to start planning and saving for retirement was yesterday. Those who begin their retirement journey as soon as they start working get to take advantage of long-term gains in the market and the power of compounding interest. However, just because you’re starting later than the ideal doesn’t mean you should give up or give in to the idea that you’ll need to work until you’re 85.
You might need to rely on a salary longer or stay invested longer than your peers who started earlier, but there’s still time to save. After age 50, you have the opportunity to make catch-up contributions to your IRA of up to an additional $1,000 or $7,000 total per year, or up to an additional $6,500 to your employer-sponsored 401(k) plan or up to $20,500 total annually. Hypothetically, if you take advantage of this option and contribute an additional $1,000 per year to your IRA starting at age 50, this can result in an additional $27,000 in retirement savings by 65.
Keep in mind, you can also downsize your lifestyle to meet your retirement goals. It could be as simple as choosing to drive an older car or cutting back on your entertainment budget now so you can avoid working well into your 70s later.
2. My Taxes Will Be Lower in Retirement
Some of the earliest advice most people get about retirement planning relates to their employee 401(k) plan, and the idea behind tax-deferred savings is tied to the idea that your taxes will be lower in retirement. But this is not necessarily true. Earning less from your investments than you did from your salary could put you in a lower tax bracket; however, this doesn’t represent the full picture. Although your earned income may decrease in retirement, the overall percentage of taxes you pay may not.
It’s likely that some of the tax breaks you enjoyed during your earning years, such as mortgage write-offs, will end. Not only that, but state and local taxes are likely to rise over time.
3. My Cost of Living Will Go Down in Retirement
Many people believe that retirement means slowing down, living modestly, clipping coupons, and taking advantage of senior discounts. Particularly when you’re younger, old age conjures images of knitting in rocking chairs or puttering around in the garden. But as years go by, you realize that you’re nowhere near ready to tag yourself out at 65 or 70.
If you’re in good health, chances are you’ll want to spend the early years of your retirement experiencing new adventures, traveling, and “living it up” a little in ways you couldn’t when you were tied down to your job. If you can swing it, retirement could mean living on more—taking all the grandkids to Disney World, enjoying the European river cruise of your dreams, or going a few rounds at Pebble Beach.
4. Social Security and Medicaid Will Take Care of Me
It’s probably safe to say that aside from low-income earners, most people recognize that relying on Social Security income for retirement is probably not going to cover their living expenses comfortably. On the other hand, many people think Medicare will replace their health insurance and take care of their medical needs. You may also believe it will cover long-term care if needed, but this isn’t true.
If you’ve ever heard cautionary tales of seniors deciding between buying groceries or paying for medication, let that be a warning. Out-of-pocket costs for medications can be significant, and most older adults need to take prescription medications on an ongoing basis. Additionally, Medicare offers limited, if any, long-term care coverage, and you would likely need to pay substantial out-of-pocket costs. For example, a semi-private room in a nursing home costs an average of $255 per day or $93,075 per year.(1)
5. Investing Ends with Retirement
When calculating how much is needed for retirement, many people only run the numbers up until the point of retirement. While you’ll want to be more conservative with your investments in retirement, you probably shouldn’t pull all of your money out. If you stay invested in the market, you’ll still have the opportunity for your money to grow throughout retirement.
Ideally, you will continue to earn, save, and invest—particularly in equities markets—throughout your retirement years. Remember, when not invested, your nest egg is likely to lose purchasing power with even moderate inflation.
6. I Have to Fund My Kid’s College Education First
The cost of higher education is soaring, leaving more parents than ever in a difficult spot. You want to do what you can to help your children get a good start in life. You may even feel like it’s your responsibility to pay for their college education. But whether you want to provide your child with the same opportunity your parents gave you or you’re determined to give them an opportunity you didn’t have, you may want to reconsider.
While student loans have become a burden for many young Americans, college students still have far more options to fund their needs than older Americans. Keep in mind, there’s no financial aid or retirement loans for retirees. Moreover, something many parents don’t consider is that if you run out of money in retirement, you could end up being a financial burden on your kids later.
7. Nobody Really Retires Anymore
It’s true that fewer people can retire these days, and more people are working well past the typical retirement age, but that doesn’t mean you will never retire. If you enjoy your job or love to work, your plan may be just to keep working. The problem is, you can’t depend on this.
The reality is, even if you’re a workaholic, you need a retirement plan. Your employer may not want to keep you around. Your skills may fall out of favor, or your performance could go down earlier than you expect. Further, it’s possible that you will become disabled or not be able to work anymore.
The Realities of Retirement
In the end, the more prepared you are for retirement, the better. No two retirement experiences are the same, so generalized advice does not apply across the board. Buying into retirement myths can lead to costly mistakes. It’s in your best interest to take what you hear about retirement with a grain of salt, do your research, and turn to a trusted financial advisor for guidance.
John J. Diak, CFP® is the Principal & Client Wealth Manager at Oatley & Diak, LLC in Parker, Colorado. He assists clients through many difficult lifestyle changes such as business downturns, retirement planning, divorce, the death of a spouse, and family estate issues among others. Oatley & Diak, LLC is a family-run registered investment advisory (RIA) firm that provides clients with investment management and financial planning services in a hands-on, intimate environment. Learn more about them at oatleydiak.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.