Are you looking forward to the day you can hand in your security badge and be on a permanent vacation in retirement?
No more annoying boss to report to, no more commuting, just endless days of whatever you want, wherever you want, right? Maybe.
In order for retirement to be relaxing, stress-free, and full of endless options there are several retirement planning myths you must be aware of ASAP so you don’t screw up your future.
1) Myth: Social Security’s Got Your Back
If you’re a regular Financial Samurai reader, you already know that Social Security benefits are not going to give you a comfortable retirement. If you’ve been expecting Social Security checks to sufficiently replace your paychecks and this is news to you, please bookmark and read through my retirement category. You’ll find a lot of eye-opening articles and helpful information.
Why is Social Security not going to cut it? The system is already underfunded by 25-30 percent and growing. The Social Security Administration openly admits this too.
The system is struggling and things are likely only going to get worse, especially with the number of Americans 65 and older going from 49 million today to almost 80 million by 2035. Without any convincing resolutions in sight and the likelihood of ever increasing full retirement age eligibility requirements and/or benefit reductions, you need a backup plan.
Plus, it’s highly unlikely the benefits you could receive will cover your entire cost of housing, food, transportation, utilities and healthcare unless you are an extreme minimalist. And keep in mind those are just basic expenses. If you want to maintain or exceed your current lifestyle, the ugly truth is the current average payout of $1,413 is quite low. Take a look at the chart below that shows increases in full retirement age eligibility and benefit reductions for early withdrawal.
You cannot count on Social Security. The three-pronged retirement stool is You, You, and You!
2) Myth: 529 Contributions Are More Important Than Your Retirement Plan
As a parent, you want the best for your kids. Your instincts probably propel you to put their needs before your own on a regular basis. The trouble is if you are solely focused on making contributions to their 529 college savings plan, you’re making a big oversight with your own future.
Thinking you can worry about saving for your retirement later is a common mistake that can backfire. Remember, when you’re on an airplane you have to secure your own oxygen mask first if there’s a crash. You can’t save your kids or help anyone else if you’re passed out from smoke inhalation!
Still need convincing on funding your retirement plan first or in addition to your kids’ college savings plan? Once your son or daughter finds out you are paying for their entire college education, they could be tempted to take it for granted.
They might skip classes, let their grades slide, change their majors several times, party too much, rack up credit card debt, and want to stay in school for as long as possible. If on the other hand, they have their own skin in the game, they’re much more likely to get focused and appreciate the opportunities available to them.
Plus, if you delay retirement planning, you lose out on the huge benefits of compounding returns that really aid in growing wealth over time. If you are unable to grow your assets to a size suitable to fund your retirement you’ll have limited flexibility, may have to work more years than desired and financial stress.
3) Myth: You Won’t Spend As Much In Retirement
A dangerous myth in retirement planning is the belief that one’s spending will go way down. While you shouldn’t have to save for retirement once you’re retired, you can’t forget about inflation and rising healthcare costs. It’s easy for living expenses to total 80 percent or more of what you were spending in your pre-retirement years.
Although the growth rate of healthcare costs has slowed and projections have been lowered, the trend is still up and to the right, i.e. costs are still expected to continue rising into the future.
You may spend less money on expenses such as housing in retirement, hopefully your mortgage will be paid off in full, but your expenses could easily shift into healthcare. Don’t forget about planning for potentially higher entertainment expenses too. After all, the best perk of retirement is having the freedom to all of the fun things you’ve been dreaming about with your extra free time.
Please be extremely careful of healthcare expenses. Healthcare related expenses is the #1 reasons for bankruptcy. Get good healthcare insurance folks. Further, if you have dependents, get good term life insurance. Check out PolicyGenius. They have the best platform that will find you appropriate quotes all in one place.
4) Myth: Your Kids Will Help If You Don’t Have Enough Money
Every parent wants his or her kids to succeed and do well in life. As a caring parent, hopefully you haven’t considered burdening them with your expenses in retirement, because that’s not good for anyone. You may dream about them leaving the nest, spreading their wings, flying off on their own, and creating their own legacy they can share with you and the world. Hopefully that will happen, but it might not happen when you hope or anywhere near as well as you expect.
All too often, parents believe their adult children are doing well financially and could help out if their retirement income dries up. However, the stats tell a different story. For example, the median net worth in 2016 was $97,300, which was lower than the median net worth of $105,800 back in 1998, yikes. Meanwhile, the current median household income is roughly $61,370 compared to $60,062 in 1999. It was even as low as $54,569 in 2012, so you just really never know how much or how little your kids could be able to earn in the future.
Don’t forget, there has been a rise in adult children living at home after graduation. Student loan debt continues to be a significant burden and the job market is more competitive than ever. Even though technology has made it easier to apply for jobs, it’s made it harder to get selected among the masses of applicants from all over the country.
It is more than likely your adult kids will rely on you to survive.
5) Myth: Leave The Principal And Live Off The Interest
If you’re hoping to accumulate a large nest egg, you may have thought about living off of the interest in retirement. If the nest egg is $1.5 million or more, this might be possible. But, for the majority of the population, this is just a pipe dream.
If you are part of the majority and do not have the retirement fund of a millionaire, do not worry. Part of the reason of having a nest egg is to actually use it. What good is it to save up all your life if you’re only going to spend a very small portion of what you worked so hard for once you are retired?
If you have $750,000 saved up and you withdraw $10,000 from the principal each year, this principal would, in theory, last for 75 years. At this rate, I would suspect that you would feel pretty good about having your principal last for the rest of your lifetime. Continue to beware though. There are always fluctuations in the market that can reduce your principal. If you plan to cut into your nest egg, do so sparingly and according to your careful plan.
6) Save Money By Downsizing Your House
The largest lifetime purchase for most Americans is their house. By the time you retire, your property will hopefully have appreciated in value. Some people plan on selling their house when they retire so they can downsize and live off the proceeds.
The trouble with this is that it’s much easier said than done, isn’t always practical, and by the time you’re retired you may no longer have any desire to move. Moving is a big pain after all and selling a property can be a long, stressful process.
Selling a house is emotional, especially when you’ve built a lifetime of memories in it. The stress of feeling forced to sell when you no longer want to can adversely affect health and happiness too. And don’t forget there’s no guarantee that the housing market will be strong when you want to sell or that you can find an affordable replacement home in an area and size that you desire.
Utilize Retirement Planning Tools To Achieve A Blissful Future
Life can throw unexpected twists and turns along the way, but proper retirement planning can help you withstand any curve ball. Be as realistic as possible with your desired lifestyle needs, savings goals, day to day expenses and unexpected emergency costs. Make things easier on yourself by utilizing retirement planning tools to help take the confusion and complexity out of the process as well.
Personal Capital has the best retirement calculator and planner on the market because it uses real data and Monte Carlo simulations to come up with the most realistic financial scenarios for your future. Other calculators simply ask you to guess input values to then come up with your financial future. The problem with this method is that we often underestimate how much we are saving and spending.
With Personal Capital’s retirement planner you can input different life events such as a wedding or home purchase in your cash flow statement and recalculate your financial future to see how you’ll do. Personal Capital has by far the best retirement calculator online.
For further clarity and confidence into your financial life, simply sign up for Personal Capital, link all your accounts, and their Retirement Planner will use your real time account data to compute real outputs for your future. Everybody should give it a try.
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