8 Myths About Money During Retirement

by Jenn

Financial planning for retirement can be a scary thing. There are a lot of things to consider and plan for when there’s a high level of uncertainty, including identifying the best index funds for retirement investing. Because of this, there are a lot of “rules of thumb” that you can find all over the place, but they’re not all correct. Keep reading to learn more about some myths that surround financial planning during retirement.

My 401(k) is All I Need

Even the best companies will match up to 6% of your 401(k) contribution. This makes your total contribution 12% of your annual income. For the sake of simple math, let’s say that you make $100k a year, which means that you’re putting $12k into your 401(k). If you’re with a company for 40 years, this adds up to just $480k during that time. If you enjoy a 6% interest rate on your 401(k), your total at age 65 will be $1,916,963. This makes for $76,678 to live off each year until you’re 90 years old. 

Now, understand that while that is a solid chunk of change, this is an absolutely ideal scenario. Not everyone will enjoy this level of employer benefits. Furthermore, you’re taking a pay cut the day you retire, so you’ll need to figure out how to cut expenses and change your lifestyle. These funds will need to pay all your monthly bills, cover medical expenses as they arise (and they will), and fund your retirement hobbies and travel aspirations. Don’t plan on relying entirely on your 401(k) and establish other savings with something like an IRA.

A retirement calculator can help you figure out how much your retirement savings will be by the time you reach retirement age.

I Only Need 70-80% of My Pre-Retirement Expenses

In the previous example, we saw that you took a nearly 24% pay cut the day you retired. While there are expenses and taxes that will go away when you’re not working, other expenses will take their place. A survey by the Employee Benefit Research Institute found that more than half of retirees spend 95% or more pre-retirement income. It’s more realistic to plan to live off an amount that’s closer to what you’re used to. 

Medicare Will Cover My Medical Bills

Contrary to popular belief, Medicare will not cover all of your medical bills. While your Medicare plan will help, and maybe even cover a majority of them, you still need to cover your portion of the costs. Whether these bills are monthly premiums or co-pays, your part of the bills will come due. 

Keep in mind that medical care is incredibly expensive, and you can end up paying hundreds or thousands of dollars even if you’re only paying your share.

A Reverse Mortgage is a Bad Idea

If it turns out that your retirement funds will not stretch as needed, you can supplement your income with a reverse mortgage. Reverse mortgages are simply a loan from a lender using the equity in your home as collateral. Instead of making monthly structured repayments to your lender (E.g., 30-year or 15-year term), the interest is added to your outstanding loan balance. You can repay the interest at any time without penalty, or let it accrue and it will be paid back when your home is later sold. 

Will you or your heirs enjoy as much money when you sell your home? No, but you’ll enjoy the benefits by taking care of your financial needs at the time that they matter, and your heirs won’t be left a financial burden as reverse mortgages are non-recourse loans. 

Reverse mortgages do not come without risk. Those who cannot afford to maintain future property charges such as taxes and insurance can end up in default, so speak to your trusted advisor to determine if a reverse mortgage is suitable for your situation.

You can learn more about current interest rates by working with this reverse mortgage calculator from All Reverse Mortgage. 

Social Security Has Me Covered

We’ve already established that you’re going to need more money than you think during retirement. This means that Social Security can work as an effective supplement but shouldn’t serve as your primary source of funds. 

Draw from your 401(k), IRA, and other savings you have. Your Social Security can help supplement your monthly allotment and provide an extra cushion if you need it.

I Need to Make Conservative Investments

Why high-risk investments aren’t recommended as a way to “catch up” on your retirement nest egg, it can be a fast way to continue to grow it. You can make high-risk, high-reward investments and still be comfortable in your retirement. However, it’s important to assess the amount that you’re investing at the time. Whether you’re investing in the stock market or a major asset, never invest more than you’re willing to lose because retirement is not the time that you can earn that back.

If you’re considering investment opportunities, speak with an investment expert to help weigh your available options.

I Only Need to Plan for 20 Years

Plan to make your money last longer than you do. These days, the likelihood that you will make it to age 90 is 34% for women and 23% for men. Those are odds that most people are willing to take. Your money will be long gone by this time if you’re only planning to live to 85. It’s been said that it’s better to shoot for the stars and miss than to shoot for the manure pile and miss. Give yourself a financial cushion by shooting for the stars and saving beyond 20 years past retirement age

I’m Young, I Don’t Need to Save

You’re never too young to save for retirement, especially if your employer matches your contribution. The sooner you start contributing to your 401(k) and building your retirement nest egg, the better off you’ll be in the long run. Whether you’re looking to travel the world, golf seven days a week, or simply want to live a comfortable and carefree life during retirement, the more money you have tucked away the better off you’ll be.

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