Retirement is filled with hopes, dreams, and yes – fears of the unknown. To help you avoid common retirement misconceptions, Johnson Wealth & Income Management are reviewing these 10 common retirement planning myths with you.
People entering retirement have more than likely heard some wisdoms but not all of them are accurate. Retirement planning takes a lot of preparation, and if you don’t have the correct tools in hand you could be looking at mistakes down the road.
After all, you’ve worked hard to build a plan that can fulfill your dreams during retirement. Don’t you want to get the most from your savings? Johnson Wealth and Income Management has compiled a list of myths and mistakes try to avoid in your retirement plan.
Here’s the top ten myths you need to know.
#1. A Majority of your Healthcare is Covered by Medicare
Healthcare is one of the most rapidly growing costs for many retirees. In one study conducted by annuity, a healthy 65-year-old couple retiring this year can expect more than $662,000 in healthcare costs alone. This number includes medicare premium, deductibles and copayments for medications.
It’s important to take a step back and look at the bigger picture. While medicare is a great thing to have, it’s important to know that it doesn’t cover everything. If you’re nearing retirement, now is the time to save aggressively so you have enough money to help cover your healthcare expenses.
#2. Paying Less in Taxes During Retirement
One of the biggest retirement myths is not adjusting your total amount of adjusted gross income. As a retiree or a soon to be retiree you should be managing it. Your AGI helps determine what tax bracket you are in. Depending on where you call on the AGI scale, you could possibly be looking at paying more in taxes.
Your AGI has an effect on how much you will pay taxes on Social Security and medicare premiums. By having a lower AGI, you can help keep more of your retirement income for yourself. In some cases, you can help retain money by having less income.
#3. All Debt is Bad Debt
When you’re planning for retirement, it’s easy to think that debt is a problem but not all debt is bad debt.
For example: Your home mortgage may carry a much lower interest rate than credit cards or other types of debt. That being said, if you’d like to lower your debt burden during retirement, downsizing your mortgage might be a good option. You can sell your current home and help purchase a more affordable one using the equity from the sale towards the purchase. You’ll help finance a smaller amount, which could give you more affordable monthly mortgage payments.
Another option is to finance a part of your new home and invest the proceeds from the sale into other investment vehicles that have the potential to earn a higher rate of return than the rate you’ll pay on the new mortgage. Keep in mind that selling your home may come with tax obligations, so work with someone who understands your state and local tax circumstances.
#4. You Won’t be Able to Pay the Bills
Prime time news slots are filled with segments on workers who fail to save for retirement. You can easily be persuaded to think that most people nearing or in retirement are going without the basic necessities of life.
Many people are afraid that they won’t be able to afford to retire—that they’ll be living on 70% of their final income, or less. But the truth is, most mid-career families live on 35% of their gross income after mortgages and debt payments are subtracted. By retirement, many of those expenses have disappeared, meaning people can get by with less income.
#5. Not Accounting for Day-to-Day Expenses
Retirement is a time to enjoy your life. You’ll have more time to spend with family, friends, and loved ones. You can travel more often and explore new places. You can spend more time volunteering at your favorite cause.
But before you retire, make sure you think about the new expenses that will come with your free time. It’s easy to assume that the cost of commutes, lunches out, and casual spending will go down once you retire—but they probably won’t. If anything, they’ll go up because you’ll have all day to spend money on them.
That’s why it’s so important to plan for your new daily and monthly expenses now. If you don’t plan for these costs as part of your retirement budget, it could lead to unexpected debt in retirement.
#6. Moving Investments to Stable Funds
It’s a common misconception that if you’re retired and not working, you should be moving your money out of the stock market. This is due to the fact that many people assume they can’t afford to retire until they have a large nest egg. It begs the question, should investments be moved into safe funds after retirement? The truth is, it’s more important to have a diversified portfolio in the long run.
Putting money in CDs or a bond portfolio can be just as dangerous as being overly aggressive in investing. As life expectancy extends, people risk running out of cash if their investments aren’t at least keeping up with inflation.
#7. You’ll Retire When You Want To
We all dream about retirement in a way that is oftentimes stress free. Like having more time to relax and travel to exotic destinations. However, things don’t always turn out like we plan them. It’s estimated that approximately half of US workers retire before they expect to.
Of those who retire early, 60 percent leave the workforce due to health or disability issues. Others were pushed out of a job due to company downsizing, or they had to leave to care for a family member.
#8. Hoping Social Security and a Pension will be Enough
As you get ready to retire, there are some common misconceptions that can derail your plans. We’ve already talked about underestimating expenses in retirement. Even if you’ve paid off your mortgage, vehicle loans and credit card debt, you cannot predict cost-of-living increases, inflation, escalating property taxes, and rising health care costs. A year from now, the cost of these things could be higher.
Social Security income was always intended as a safety net, not a replacement for retirement savings. Your day-to-day retirement income savings will consist of Social Security benefits in part, but also pensions if you’ve earned them, any other investments and your savings. It’s recommended that your retirement income should equal 70—80% of your pre-retirement income for a comfortable retirement.
It may be important to review your retirement plan with a trusted financial advisor soon. You might find better ways to save smarter for your retirement.
#9. Retirement Planning Can Wait
The most dangerous retirement myth is that you always have time to start planning later. Unfortunately, things like compound interest – the force that helps beef up retirement accounts – works best when money is invested early. Waiting too long to save could leave you whittling down your bucket list later in life.
Perhaps you’re a parent with a child getting ready to go to college. Parents often make the mistake of putting a college savings fund before their retirement. Young adults can utilize student loans and pay them off once they’re done with school. However, you can’t get a loan for retirement.
#10. Retirement Planning Without a Financial Advisor
We all want to retire someday, but it can be hard to know how to get there. There are a lot of myths out there about retirement planning, and they can make you feel like you’re not doing enough or that you’ll never be able to retire.
The internet is a great place to gather information on almost any topic. When it comes down to emotion-driven subjects like your personal finances, you may find that information is often designed to scare you more than help you. Retirement planning should be based on your dreams, not your fears.
A professional financial advisor can help you plan for the retirement you want while accounting for most changes that life may bring. Planning for your retirement, armed with solid information, will help you decide when you can go it alone or when to get help.
Retirement planning with Johnson Wealth and Income Management
Having a trusted Fiduciary advisor by your side will help you set realistic goals and expectations for your retirement. They will help see fact from fiction in order to guide you through a more safe and more secure retirement. Your local Johnson Wealth and Income Management Iowa Fiduciary advisor will work with you to craft a plan specific to your needs. Have any questions about retirement planning? Contact us today to set up your complimentary consultation.
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