Retirement is a subject that many have preconceived notions about. With the seemingly never-ending stream of information available today, it’s almost impossible to not base theories about your own retirement savings strategy on others you’ve heard about. Whether it’s pinpointing a goal retirement age early on (usually 65) or selecting an arbitrary number as a savings goal (such as $1 million), many are under the assumption that when it comes to retirement, there’s not much they don’t know about.
Realistically, retirement consists of something very different for everyone—and that’s okay! Realizing this, and critically thinking about what retirement could actually be like for you, can completely change for the better how you’re preparing financially for this stage in life. As retirement is a stage that takes decades to prepare for financially, it’s imperative to put together a well-rounded strategy early on to set yourself up for a comfortable retirement.
In order to accomplish this, it’s important to also separate some of the most common “myths” on retirement from reality. Read on for 5 of the most popular retirement savings myths, debunked:
For young professionals just joining the workforce, it may be tempting to opt out of the company-provided 401(k) and pocket more of your money on a month-to-month basis. While this will definitely lend you more spending money for the meantime, it will also mean that you’ll have to work much harder to save more down the road. Those that adapt a comprehensive retirement savings strategy early on, whether through an employer-provided plan or otherwise, will reap the benefits of compound interest and the time value of money. Compound interest is the interest that accumulates over time both on your investment and eventually on the accrued interest. With this, the earlier you start to save, the less you’ll have to save each month to reach your eventual goal.
If that isn’t enough to convince you, take into account the substantially longer lifespans people are living. About one in three of today’s 65-year-olds will live until at least age 90, and one in seven will live until at least age 95.1 Furthermore, according to a 2017 study, just 6 out of 10 American workers felt very or somewhat confident in their ability to retire comfortably with enough money.2 Taking as much time as possible to save for this stage requires foresight and will relieve yourself down the road from scrambling to adequately prepare.
Relying on government-funded programs like Social Security or Medicare might have worked well in the past. However, just like relying on company-funded pensions, utilizing these programs as your sole retirement funding strategy is a little risky. That’s not to say that you shouldn’t take advantage of the benefits they do provide. Social Security payments can be a great help, especially if you delay receiving payments until age 70, and Medicare can be extraordinarily helpful for those with the odd doctor or hospital visit to attend to.
However, relying on Social Security without other savings options to fall back on can lead to having to live well below your means. Moreover, if the time comes for you to require long-term health care, Medicare covers very little. About 52% of those ages 65 and older will require some sort of long-term health care services during their lifetimes and both Medicare and health insurance cover very little of ongoing care services, with Medicaid only providing some coverage to lower-income Americans.3 It’s important to have a strategy in place to prepare for items such as these to avoid completely disrupting your budget should you require long-term care.
Many assume that their monthly budget in retirement will be significantly less than their pre-retirement one. While this could be the case, it could also certainly change. Retirement likely won’t just be 3 to 5 years of your life—it could be anywhere from 10 to 20 to even 30 or more years. It’s smart to have a comprehensive budget in place, but you are almost guaranteed to have years where you have to substantially modify your budget.
While certain costs are almost guaranteed to decrease in retirement, like mortgage or debt payments and child-related expenses, others will likely increase. If you decide to move closer to family, work on whittling down the places on your travel bucket list, or pick up a new hobby or activity, your budget may need to be adjusted to adapt to your lifestyle.
Striving to work past the traditional retirement age of 65 is a great goal. As mentioned above, people are living longer lives. With this comes the natural desire and/or ability to work a little longer than many traditionally would.
Unfortunately, you can’t predict the future. Many early retirements are not by choice, rather by something unexpected leaving the individual with little choice but to retire. Whether it’s due to an unexpected layoff, a disabling injury or illness, a family member that needs more full-time caretaking, your own declining health, growing disinterest in your job, or more, there are a number of factors that could contribute to an unplanned early retirement. You can certainly aim to work as long as you are able to yet having a back-up option in place is wise.
Prioritizing saving for retirement at any age shouldn’t mean that all of your other goals need to be set aside. A sound financial strategy will incorporate all your goals, both short- and long-term. Whether you need to pay down credit card or student loan debt, save for becoming a homeowner, put money toward your child’s college education and much more, you’re able to take on multiple goals at once—it’s just a matter of learning how to do so. Your financial advisor can help you identify which goals you’d like to take on first and which you’d still like to actively work toward.
Written by North Star Resource Group.
1 “When to Start Receiving Retirement Benefits.” Social Security Administration, Publication No. 05-10147. Last modified January 2018.
2 “The 2017 Retirement Confidence Survey: Many Workers Lack Retirement Confidence and Feel Stressed About Retirement Preparations.” Employee Benefit Research Institute, No. 431. Published March 21, 2017.
3 Favreault, Melissa and Judith Dey. “Long-Term Services and Supports for Older Americans: Risks and Financing Research Brief.” Office of the Assistant Secretary for Planning and Evaluation. Revised February 2016.
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