Retirement is a complex subject with a lot riding on it, and while there is plenty of advice out there regarding retirement, not all of it is as sound as one may like. Even some of the most basic aspects of retirement are surrounded by misconceptions. In this two-part series, we will uncover some of these misconceptions, highlighting where one can go off-track when planning for retirement and how to get things running smoothly again.
- You Should Start Saving ASAP
Many people, especially those in younger demographics, assume that even if they fall behind on saving for retirement now, they’ll have plenty of time to make up for it later. However, this line of thinking fails to account for one very important thing: compounding interest. Thanks to compounding, the longer that your savings are invested, the more interest you will earn on those investments. The longer you wait before investing, the less you will be able to benefit from the compounding effect. Even investing a relatively small amount now can earn you more over time than you would get from putting it off and investing more heavily later in life.
- No Matter Your Age, Make a Budget and Stick to It
If your retirement is decades away, it can be easy to dismiss retirement-related budgets as something that you won’t have to worry about for a long time. But even if it seems like something that’s a long way off, it’s still a good idea to set up a budget as soon as possible and stick to it all the way into retirement. Many people do not realize just how much they need to be saving until they start to crunch the numbers.
In addition to budgeting for everything that will come before your retirement, you should also consider what your post-retirement budget will look like. This is a place where a lot of people stumble, as there are widespread misconceptions about how flexible post-retirement spending can be. When constructing a post-retirement budget, note that most advisors recommend that retirees withdraw at most 5% of their savings each year. Ideally, you’d like to be withdrawing even less.
- There is No Magic Number Guaranteeing a Comfy Retirement
A lot of books and general retirement advice will point you towards a specific number as the goal you have to meet if you want a sound, comfortable retirement. While this can be a useful jumping-off point for retirement planning, you have to remember that this generic advice is just that – generic. Everyone’s situation is unique, and there are any number of different factors that can impact how much your “ideal” amount would be. Even something as simple as where you live can have a massive impact on the costs you will face post-retirement. When you hear advice that points to a specific goal or threshold, feel free to keep it in mind as a general guideline, but don’t assume that it applies perfectly to your own retirement needs.
- Post-Retirement Living Isn’t Cheap
When budgeting for retirement, many people assume that their living expenses will drop significantly after they retire. Some of your living expenses probably will decrease after retirement, but the reality is that many of them will not. Retirement will not diminish your need for many of the things you purchase right now – food, clothes, heat, electricity, and so forth. On top of this, you need to account for the increased likelihood of medical issues, which can prove immensely expensive in their own right. A sound retirement budget should account for these types of expenses.
- Retirees Still Pay Taxes
Similar to the issue of living expenses, it is a common misconception that once a person has retired, they will owe less in taxes. After all, retirement means less income, which means smaller income taxes. Right? Well, that’s true, but you also need to remember that there are many ways that you can earn deductions on your income taxes, and at least some of these will no longer be an option once you reach retirement age. For example, you will most likely no longer be claiming dependents. At the end of the day, even if your income itself is lower than it used to be, you may end up owing a greater proportion of your income in taxes than you used to.
- Social Security Will Not Replace Your Income
From its very inception, Social Security was meant to act as a safety net if one ever needed it, not as something that retirees could wholeheartedly rely upon. At most, Social Security will provide about 40% of your pre-retirement income. This value can be much less if you had a well-paying job prior to your retirement. Social Security pays the average recipient about $17,500 each year, and while this may sound like a nice amount, know that the average retired household spends more than $45,000 annually. Thus, Social Security should be used as it is intended – as a supplemental form of income that can help you out if you need it, and not as your primary source of post-retirement funding.
- Even the Best-Laid Plans can Go Awry
s with anything, it is good to go into retirement with a plan. Make a budget, decide when you’d like to retire, where you would like to live post-retirement, and so on. However, it is important to keep in mind that things don’t always go according to plan. Because of this, none of your plans should be set in stone, and your savings and post-retirement strategy shouldn’t hinge on your retiring at a specific age, or being able to find a part-time job afterward. Part-time jobs can be harder to find than you may expect, since many employers would rather choose a younger employee willing to work for lower pay. And you never know what may happen when it comes to things like medical problems. A 2015 survey from the Employee Benefit Research Institute reported that half of US workers retire sooner than they had planned, with 60% leaving due to health issues or disabilities.
In short: start planning for retirement early, don’t count on taxes and other expenses going away after you retire, and be sure to make your plan flexible enough that an early retirement or other unforeseen circumstance won’t bring the entire thing crashing down. In Part 2 of this article, we will discuss common misconceptions regarding savings and investment strategies.