Search the internet, and you’ll see that there’s a ton of retirement advice out there. Some of it’s good, some, less so. But one thing you definitely don’t want to do is buy into some of the common misconceptions that tend to circulate with regard to retirement. If you make the mistake of believing the following myths, you’re likely to wind up miserable during your golden years.
1. You’ll be able to live on Social Security alone
Though Social Security does serve as a critical income source for millions of retirees, those benefits are not designed to sustain you in the absence of other income. If you’re an average earner, you can expect your benefits to replace about 40% of the income you’re used to, though that assumes benefits don’t get slashed across the board in the future. Most seniors, meanwhile, need roughly double that amount to live comfortably in retirement, and some, inevitably, require more. As such, depending on Social Security alone is a horrendously bad idea.
If you’re not convinced that you’ll need around 80% of your pre-retirement income once you stop working, consider this: Other than your mortgage, which you might conceivably pay off prior to retirement, and your commuting costs, your remaining expenses are likely to stay the same. Now, think about the savings you’ll reap by not paying a mortgage, or for gas and tolls. If those really equal 60% of your current income, then sure, go ahead and fall back on Social Security. Otherwise, do your best to ramp up on the retirement savings front so you have money to tap once your paycheck ceases to exist.
2. Medicare will cover all of your healthcare needs
Many seniors assume that once they get on Medicare, they’ll pay a modest premium and call it a day. The reality? Those premiums aren’t so modest, and even once you fork them over, you’re by no means guaranteed coverage for every healthcare service you might need. In fact, there are a number of common services that Medicare notably does not cover, like dental cleanings, vision exams, and hearing aids. As such, you’ll need to pay for those expenses out of pocket, which could substantially add to your costs.
Now there is the option to sign up for Medicare Advantage, which is an alternative to original Medicare that does commonly cover services like dental, vision, and hearing. But you’ll need to pay a separate premium for Advantage on top of your Part B premiums, and you may be restricted to a limited provider network if you go that route.
The takeaway? Save a lot for healthcare in retirement, and anticipate your costs under Medicare to be higher than initially expected.
3. You’ll be fine withdrawing 4% of your retirement savings annually
Many financial planners advocate following the 4% rule when withdrawing from retirement savings. The rule states that if you begin by removing 4% of your nest egg during your first year of retirement, and then adjusting subsequent withdrawals to allow for inflation, your savings should last 30 years.
But the 4% rule is far from perfect, and following it could cause you to deplete your nest egg prematurely. For one thing, most seniors are advised to shift toward safer investments, like bonds, during retirement, because an all-stock portfolio is simply too risky. But bonds don’t pay interest today like they did back when the 4% rule was established. As such, if you’re looking at a portfolio that’s split evenly between stocks and bonds, the bond portion may not generate enough income to allow for an annual 4% withdrawal rate.
Another issue with the 4% rule is that it assumes you’re looking at a 30-year retirement. But life expectancies have increased since the rule was put into place, and if you retire on the early side — say, in your late 50s — you could be looking at well more than 30 years of withdrawals.
The punchline? Don’t regard the 4% rule as gospel. You can use it as a starting point, but it pays to establish your own withdrawal strategy based on your age, investment mix, and goals.
Of the various financial myths you can’t afford to fall victim to, the above three rank pretty highly. Getting to the bottom of them could help you skirt some very costly mistakes that wreck your retirement, so educate yourself to avoid a world of regret.
