Preparing for retirement can take a great deal of planning throughout your life, from when you first start working to the final push prior to retirement. Unfortunately, many myths about retirement exist and can cause people to make unwise decisions related to their money. If you understand these myths, you can avoid making missteps and continue on the path toward preparing for a secure retirement. The following are some myths you need to know:
You can always work longer to save money.
Many people delay saving for retirement because they think that they can work longer in order to save the money that they need. While you may feel like this is not a big deal when you are younger, your mindset could change as you grow closer to retirement and realize that you may not have the time to do the things on your bucket list unless you continue to work. Moreover, working longer is not always an option. According to a recent survey, more than 70 percent of employees said that they plan to work during their retirement years, yet less than 30 percent actually did so. Obtaining employment during those years is not always an easy task, and you could end up taking a pay cut depending on the type of employment that you find. Companies often try to push people nearing retirement out of positions as a cost-saving measure, which can make it difficult to continue to work.
Social Security income covers most retirement expenses.
While Social Security can provide a predictable and reliable retirement income, the reality is that this money will only scratch the surface of retirement expenses for most people. Currently, retirees have an average monthly income of about $1,500, which totals approximately $18,000 per year. This amount will not even cover rent and food for many people. The entire picture becomes more complicated when considering that recent projections show that Social Security benefits will likely be cut substantially in the next 15 years, so your purchasing power may be even lower by the time that you retire. In reality, Social Security will not provide you with enough money to travel or pursue other retirement goals. If that was your plan, you should consider alternative saving methods in order to maximize your retirement income.
A reverse mortgage can help to cover your retirement costs.
While the idea of using a reverse mortgage to fund your retirement may sound good in theory, the problem is that these loans entail high fees. For example, origination costs are often up to 2 percent of the value of your home, which is money that is simply lost. Also, you will need to pay for mortgage insurance on a reverse mortgage, which further limits the benefits of this approach. You should also recognize that loan limitations exist depending on your age and the equity that you have in your home. Often, the limits placed on these loans are quite significant for people in retirement, which can restrict their ability to fund a comfortable retirement. While a reverse mortgage can prove helpful in some circumstances, you cannot rely on it as a meaningful source of income once you retire.
Medicare will cover all medical expenses for retirees.
One of the biggest myths about retirement relates to the role of health insurance. While many people believe that Medicare will cover their health expenses in retirement, this is not true. You will still face deductibles, co-pays, and uncovered expenses. For example, long-term care is not covered by Medicare, and you will need a separate insurance policy to pay for this sort of treatment. Unfortunately, long-term care is the largest health expense in retirement, with the median annual cost of care at an assisted living facility amounting to approximately $48,000 and more than double that for a private room. The most recent research suggests that couples need approximately $300,000 saved for healthcare expenses in retirement, even when they have Medicare.
You will spend less money overall in retirement.
While many people expect that they will spend less in retirement than they currently do, this is not always the case. This is what makes it so difficult to plan for how much money you will need to save for retirement. The traditional rule of thumb is that you should expect to spend between 70 and 80 percent of what you currently do, but the amount will vary a lot based on your goals. If you plan to travel a lot—even if only to visit your children and grandchildren—you may end up spending the same amount, if not more. Also, if you are looking at picking up some new hobbies, you could end up spending a considerable amount there, too. All of this also relates to taxes. People often assume that they will pay fewer taxes in retirement since they have less income, but if you end up spending as much as you previously made, you may not end up in a lower tax bracket.