Talking about retirement is tough. Because you’re talking about someone’s life savings, their future, it makes any conversation more difficult. One mistake could be potentially devastating.
And yet that doesn’t stop everyone from handing out retirement advice like it’s Werther’s hard candy. This situation has resulted in a saturation of underwhelming, poor, and even dangerous beliefs about retirement.
So it is important when you’re planning your retirement to know what information you should follow, and what you can ignore. These 13 retirement myths you should avoid to improve your current and future financial wellness.
1. You only Contribute Up to The Match
Any contributions to your 401(k) account are a great place to start for your retirement planning. Still, if you are only contributing the amount that gets you the maximum match from your employer, you may not be saving enough.
Most employers will match between three and six percent of your pre-tax income. So, if you save four percent and your company matches, you are only saving a total of eight percent.
A majority of experts recommend that, if you want to maintain your pre-retirement lifestyle, you should save AT LEAST 10 percent of every paycheck. So obviously if you’re saving eight percent of your income, you’re going to come up well short of 15 percent.
The more you save, the less you will have to worry about money during your retirement. That’s why saving only up to the percentage your employer matches, could be a mistake.
2. You Don’t Need a Budget
This myth is actually two parts. The first piece of misinformation is that you won’t need a budget while saving for retirement. If you’re forty years from retirement, chances are creating a budget to prepare for retirement isn’t your first worry.
Still, it is important for everyone, even the youngsters, to create and follow a budget as soon as possible. And you should continue to follow this budget even into retirement.
Many people believe that retiring means you are free from following a budget. A survey conducted by Fidelity Investments found that more than 10 percent of Baby Boomers believed that they could withdraw 10 to 12 percent of their income, annually.
Most advisors recommend that each retiree should withdraw no more than 3-5 percent of their savings per year. Spending over 10 percent of your budget every year could leave you open to financial troubles in the future.
3. You’ll be Able to Choose When You Retire
If you have your retirement all planned out, that’s great! But keep in mind how unlikely it is that you will get to choose specifically when, where, and why you retire. Life gets in the way of even the best-laid plans.
If you are saving less than you should be, in the belief that you will retire much later, or get a part-time job post retirement, you may be in trouble. Injury, illness, or family matters may force you into retirement earlier than you wished.
According to a 2015 survey by the Employee Benefit Research Institute, half of U.S. workers retire before they expect to. Also, of those, 60 percent leave the workforce early due to health or disability issues.
Similarly, it may not be as easy to get a part-time job after retirement, as you would believe. Employers, especially for a part-time job, are likely going to prefer younger candidates who are more flexible and cheaper.
4. You’ll be Able to Rely on Social Security for Replacement Income
Let’s all say this next line together. SOCIAL SECURITY WAS NEVER INTENDED TO REPLACE YOUR INCOME. Over the course of the past 82 years, social security has almost entirely transformed.
It has turned from a security blanket meant to reassure citizens in the wake of the Great Depression, into what many people bank on as their main source of income in retirement.
The most you will get out of Social Security is around 40 percent of your pre-retirement income. For those who earned more over their career, this percentage will be even lower.
Today, Social Security pays the average recipient only $1,461 a month in benefits, which adds up to $17,532 a year. Meanwhile the average retired household spends $46,000 a year. Clearly, there’s a significant gap in these figures.
So, don’t rely on Social Security your only, or even primary, source of income. Retiring on Social Security without any savings can lead to a retirement filled with years of stress and anxiety.
5. You Assume Your Taxes Will Be Lower
Many people believe that when they retire, they will be making less money and will, therefore, save on taxes. But this assumption isn’t always a safe one to make.
As you age, it is likely that you will have fewer federal deductions and dependents you can claim. This could result in a greater percentage of your income being taken by taxes.
6. You Move Your Investments as You Age
A lot of people will invest more aggressively the younger they are. Then as they grow older, they begin to invest more in bonds, CDs, and other safer investment options. Now, less risk is a good thing, but it usually means a lower rate of return.
Even if you wait until retirement, to switch your investment strategy, it could backfire. As life expectancies grow, the average person will need more savings. If you invest too conservatively, it can be almost as dangerous as investing too aggressively.
A switch to a strict, conservative, investment plan may result in you running out of money faster than you otherwise would have.
7. You Don’t Have to Invest Aggressively if You Start Early
As per The Motley Fool, the main draw of tax-deferred retirement accounts like IRAs and 401(k)s is the ability to grow your money without having to pay taxes on any of your investment gains.
These tax incentives allow you to reinvest your gains, and get more advantage of the compounding effect. Still, you may not be making full use of this advantage if you are investing too conservatively.
A 2016 Wells Fargo study found that 60 percent of workers aren’t investing aggressively enough. The study said that savers in the 30s, 40s, and 50s are so focused on minimizing losses that they’re not capitalizing on growth opportunities.
In other words, too many people aren’t investing in stocks because they’re one of the most volatile investments in the market. But switching from a bond-focused to a stock-focused investment strategy could double your final savings.
If you invest conservatively from the beginning, you could be losing out on hundreds of thousands of dollars over the course of your career.
8. You Believe There’s a Specific Number You Need to Meet
Many people think that there is some magic number you need to reach before you can retire. What many books and experts fail to recognize is that every person’s situation is different.
Every person will need to save a different amount and is are a multitude of variables that determine the amount. Two individuals who are the same age will likely need to save different amounts.
For example, you can be the same age as your friend but, gender, socioeconomic status, and where you live will result in the two of you needing different amounts for retirement.
9. You Only Use One Savings Tool
One, often overlooked error is exclusively saving through your 401(k) plan. While 401(k)s are excellent, retirement saving vehicles they are not the only kind. Using a different savings tool, such as an IRA, to supplement what you are already saving in your 401(k) can provide several benefits.
The first benefit is that you get a more diverse set of investment options. Employer-sponsored retirement plans usually have a pre-set, limited amount of investing options. IRAs and other investment vehicles often offer a wider array of investment options.
Additionally, these accounts can provide different tax incentives that your employer-sponsored plan cannot. Money put into a Roth IRA, for example, is taxed right away, but then grows tax-free growth, and can be withdrawn at any time, tax-free.
None of this is to suggest you shouldn’t save through your employer’s plan. Rather, diversify your accounts as you would the investments themselves.
10. You Think There’s Always Time to Catch Up
One of the biggest mistakes any person can make is believing that they will always have a chance to make up savings. If they don’t save in their twenties and thirties, they will just make up for it in their 40s and 50s.
DO NOT FALL FOR THIS LINE OF THINKING. The biggest advantage you have in your early 20s is not one that can ever be replicated: time. Through compounding, you can grow your money at a rate that would otherwise be impossible.
According to Jon Ullin, managing principal of Wealth Management in Florida, if you save $6,500 each year, and it grows at 6 percent, you will make your first million in 40 years. The longer you wait to invest, the less effect compounding has on your savings.
11. Your Living Expenses Will Drop Precipitously
Workers everywhere believe once they retire, their living costs will immediately fall. Let’s think about this idea for a second, though. What do you spend money on now, while you’re still working? Chances are a majority of what you’re spending money on today are the same things you’ll spend money on once you retire.
Housing is an excellent example of this phenomenon. You’ll require housing during your retirement. And, even if your mortgage is paid off when you retire, you’re still on the hook for insurance, heat and electricity, property taxes, and home repairs. Expenses like these are unlikely to differ in any significant way once you retire.
Plus, there’s always a chance some of your livings costs actually increase once you quit the workforce. For example, as you age there’s an increased probability you’ll have more medical issues arise which will cost you more.
12. You Need to Give Up Your Avocado Toast and Lattes
In 2017 an Australian business tycoon made headlines by blaming millennials’ financial woes on their fondness for avocado toast. Similar claims have been made by a countless number of financial “gurus,” such as Suze Orman, in regards to coffee/lattes. According to these people, you’re spending so much on breakfast food and coffee to afford to buy a house.
This belief is categorically and empirically untrue. Yes, these consumer goods may be a tad on the more expensive end. Still, even if you had an avocado toast AND a latte every day, it’s doubtful you’d ever consume enough to amount to a down payment on a house. Similarly, you can find several articles that detail how a life without lattes doesn’t guarantee a retirement flush with cash.
13. Only the Financially Illiterate Struggle with Finances
Per People Management, employers often make the mistake of believing only their employees who aren’t financially literate will struggle with their finances. But, financial wellness is far more about how much money people have and how far they’re able to stretch it than whether they know all the finer details of finances.
It’s essential to know employee education is always a plus. Still, financial education can only go so far. If a worker has an income designed for 20 years ago but must cover steadily escalating college, healthcare, and consumer goods, no amount of financial education will substitute for the only real answer – more money or better benefits.
The road to retirement is fret with risk, myths, and copious amounts of misinformation. Know these 13 retirement myths to avoid any pitfalls on your financial journey and secure a comfortable and stress-free retirement.