As a financial advisor, I’m struck by how often I hear common misconceptions from the people I work with. Nothing makes me happier than helping people understand how these ideas may have a negative impact their retirement expectations and how to correct, or better yet avoid, costly mistakes.
After all, you’ve worked hard to build a retirement fund that will fulfill your retirement dreams and you want to get the most from your retirement savings. That’s why I’ve put together these common myths and mistakes. Have you accounted for all of these in your retirement plan?
1. Myth: Health care costs will be covered by Medicare
Studies have shown that the average woman who retires at age 65 can expect to spend over 143,000 on health care costs alone. These expenditures include Medicare premiums, deductibles, and copayments for prescription drugs. You may expect on average, three years of long-term care, which could add up to more than $92,376 per individual.
2. Myth: My taxes will be reduced in retirement
It is important to manage your total amount of Adjusted Gross Income (AGI) while in retirement. Your AGI determines what tax bracket you are placed in, whether you will be required to pay taxes on your Social Security benefits, and how much you’ll pay for Medicare premiums. With a lower AGI, you can keep a greater portion of your retirement income for yourself. In some cases, you may retain more money by having less income.
3. Myth: Life insurance cash benefits will not add to my retirement fund
Did you know that your heirs will not receive any of the cash benefits accumulated in your life insurance policy? If your policy includes a cash value, you can use that cash in retirement. And you won’t owe any taxes if you take less than your accumulated premiums.
4. Myth: All debt is bad debt
Common sense tells you that less debt means more available income in retirement. But debt isn’t necessarily bad. 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, down-sizing your mortgage might be a good option. You can sell your current home, and purchase a more affordable home using the equity from the sale towards the purchase. You’ll finance a smaller amount which gives you more affordable monthly mortgage payments. Another option is to finance most or all 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 at a risk you are comfortable with 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.
5. Mistake: Failing to set expectations with loved ones
You’re planning to put your children through college and maybe even help pay for your grandchildren’s education. How will inflation, 5 years into your retirement, impact these costs? Maybe you intend to pay for weddings. Have you planned sufficiently for funeral expenses?
It’s important to review with your family what expectations they may have about your help with these emotion-driven expenses once you’re on a fixed income. Planning for a successful, enjoyable retirement means avoiding false expectations.
6. Mistake: Saving aggressively so you can retire early
When you think about early retirement, consider this: money x time = retirement. The longer you pay into your retirement fund, the more money you’ll have when you’re ready to retire. Early retirement can cost you money in savings, but also in other retirement benefits. Some of these benefits include health insurance, reduced Social Security and pension dollars, even an increase in taxes. Early retirement may equal less dollars to spend in retirement years.
7. Mistake: Assuming too much, accounting for too little
Think of all the daily and monthly expenses that will disappear the day you retire. No more costly commutes. There’s no need for a closet full of expensive suits and shoes since you aren’t dressing to impress anymore. The cost of lunches, coffee shop beverages, and gifts for coworkers are all gone. You’re not making contributions to a retirement account or a Health Savings Account.
Can these cost savings offset your new daily and monthly expenses? Probably not. You’ve got all day to spend money. You’ve got all the time in the world to take trips and attend events. Have you planned for your new, free-time expenses? If not, this may be the biggest financial planning mistake you make.
8. Mistake: Hoping Social Security and a pension will provide enough retirement income
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, escalating property taxes, home and car insurance costs, or health care costs. Gas up your car today for $2.30 a gallon. A year from now the cost could soar. And what about food costs, clothing, and basic utilities?
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 local, trusted financial advisor soon. You may find better ways to save smarter for your retirement.
9. Mistake: Assuming the stock market is too risky during retirement
When saving for retirement, the last thing you want is to lose any of your hard-earned dollars in risky investments. A basic understanding of how an investment portfolio can work for you may help alleviate your fears of stock market investments and ultimately lead to increased gains in your retirement portfolio.
First, an investment portfolio is built from a variety of income bearing options—stocks, bonds, and commodities. Your portfolio is built according to your tolerance for risk and is called a diversified portfolio. When the stock market goes up and down, a balanced, diversified portfolio should adjust well to market fluctuations.
Your local financial advisor does not invest your funds but does guide you to make informed choices about how best to build your financial retirement fund.
10. Mistake: Forgetting that Social Security benefits can be taxed in retirement
Not everyone is suited to a life of leisure. Many adults, faced with retirement, are afraid of leaving the workforce. I hear this all the time—But, what will I do? Won’t I be lonely? My husband will be underfoot!
The good news is that you can work as long as you like, are able, or your employer allows. Working longer may increase your Social Security benefit. And, being around co-workers will keep you socially active and engaged. Your earnings may help you delay taking Social Security payments which will increase by 8% a year up to age 70.
If you receive Social Security benefits, be mindful of the penalties you may pay up until full retirement age. Fifty percent of your earnings after taxes will go in your pocket but the other 50%, after reaching the earnings limit, will go back to Social Security. Depending on how much you earn, you could find yourself in a higher tax bracket.
Make sure you understand all the pros and cons before adding post-retirement work income to your retirement savings plan.
11. Mistake: Trying to tackle retirement planning on your own because you don't know how to trust
The internet is a great place to gather information on most any topic. When it comes down to emotional 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.
Building trusted relationships one client at a time
Your local Wealth Enhancement Group financial advisor will work with you to maximize the benefit from your retirement savings, so you can begin to take a more objective look at what you can expect for your retirement.
A trusted financial advisor will help you set realistic goals and steer you away from the many factors that could negatively impact your retirement financial security. To guide you into a plan that can help you achieve your retirement dreams, contact us today by calling 1-800-492-1222 or request a free financial review meeting today.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Mark Parrish has been with Wealth Enhancement Group for more than 15 years. He strives to build trust and confidence in clients to allow them to enjoy life without the burden of managing their finances.