Seven Myths That Can Help Wreck Your Retirement
Many of our notions about saving for retirement are dangerously out-of-date. Sure, these ideas may have worked for our parents or grandparents, but they don't typically add up in today's world.
Read on to see how many of these financial myths may have crept into your retirement plans.
Myth Number 1: I'll get an inheritance
The Truth: With Americans living longer, their living expenses and health-care costs are eating up retirement savings that might have been earmarked for their kids, says Dallas Salisbury, President and CEO of the Employee Benefit Research Institute (EBRI). "And for those who do get an inheritance, across that population it's about $60,000. On the one hand, that's a lot of money. But it's certainly not an amount that's going to allow somebody to avoid saving for retirement," he adds.
Myth Number 2: I'll work longer
The Truth: Even if you want to work well into your senior years, the odds are against you. About one-third of workers leave their jobs involuntarily because of layoffs, health problems, or obsolete skills, says Andrew D. Eschtruth, Communications Director at the Center for Retirement Research at Boston College.
And those who do return to the workforce after retirement often find themselves in part-time jobs with few benefits, says Ted Sarenski, CPS, PFS, CFP and Chairman of the ElderCare/PrimePlus Task Force with the American Institute of Certified Public Accountants (AICPA). Even factoring in Social Security, that's hardly a recipe for a satisfying lifestyle.
Myth Number 3: My house will fund my retirement
The Truth: Many homeowners who plan to downsize to a smaller home when they retire and free up assets won't be able to access 100% of their equity, says Sarenski. But as the real estate bust of the mid-2000s showed, home values can fall as well as rise. What's more, over a long period, the average home's value increases only at about the rate of inflation, which is far less than the return from a well-diversified investment portfolio. The bottom line: a house makes a great home but it's a risky retirement plan.
Myth Number 4: Once I'm 65, Social Security will take care of me
The Truth: Social Security is a nice supplement, but according to Sarenski it doesn't replace the income most boomers have come to expect. For example, "someone who's earning $30,000 to $40,000 today would get Social Security in the range of $12,000 to $14,000 a year." What's more, the age at which you can collect full benefits is climbing. According to the Social Security Administration, if you were born after 1960, you'll need to wait until age 67 to get full benfits. And many experts expect the "full retirement" age will increase as part of any plan to save the program from bankruptcy.
Myth Number 5: My health-care costs will be covered in retirement
The Truth: Some costs will be covered, but far from all. A growing percentage of companies are scaling back on the retired workers' health-care coverage. And Medicare typically covers only about half of retirees' health-care expenses. Even with Medicare there's still a need for a supplemental Medigap policy to cover what Medicare doesn't, says Sarenski. Based on the 2007 EBRI Retirement Confidence Survey, EBRI estimates that a couple who turned 65 in 2006 might need to spend as much as $550,000 just on insurance premiums and out-of-pocket medical costs, over a 30-year retirement.
Myth Number 6: My employer's pension will help me in retirement
The Truth: The traditional employer-funded defined-benefit pension may have been something that the last generation of retirees could count on, but not anymore. Today, fewer than 20 percent of nongovernment workers can count on receiving a specific amount of pension income at retirement, according to Andrew D. Eschtruth, Communications Director at the Center for Retirement Research at Boston College, — and that percentage is declining. And although many companies contribute to 401(k) plans and other employer-sponsored retirement plans, workers need to add their own contributions if they expect to retire with a nest egg capable of providing a decent income.
Myth Number 7: I'll spend less in retirement
The Truth: Retirement doesn't mean you stop living. Chances are, you're still going to want to enjoy a nice meal out from time to time, take vacations, and enjoy your hobbies. And although work-related expenses go away when you retire, you may face higher costs for medical care. So before you buy into the "common wisdom" that you can retire on 60-80 percent of your pre-retirement income, ask yourself what you would have to give up if your paycheck dropped by 20 percent.
Better yet, start planning for a full and enjoyable retirement lifestyle right now. After all, unlike our parents' generation, when it comes to retirement, you get to call the shots.
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