There are many myths about retirement that people often believe, and only by learning the hard way do many of those people realize the mistakes they've made in their retirement planning. By knowing about these myths before you retire, you can take action before it's too late to do anything about it. In particular, these five common misconceptions about retirement trip up many near-retirees, and it's important to get the facts so you can plan for retirement correctly.
Myth 1: Stocks aren't good investments for retirees
Most retirees understand that the older you get, the less time you have to invest for the long run, and it therefore makes sense to reduce the amount of risk you take with your investment portfolio. In the process of making your investments more conservative, however, it's important not to make the mistake of going too far and getting rid of all your exposure to the stock market. Stocks are volatile, but they also provide greater growth opportunities than most other investments. Especially in the early years of your retirement, having some growth in your nest egg is crucial to set the stage for a retirement that could easily last 20 to 30 years. By emphasizing high-quality stocks that pay income and have good prospects for solid, dependable growth, even retirees can benefit from investing in the stock market.
Myth 2: There's no need to worry about healthcare because of Medicare
It's true that Medicare kicks in at age 65 for most Americans, providing valuable access to healthcare services that in many ways is more flexible than the insurance coverage most workers have during their careers. Medicare lets you use a wide array of providers without the geographical restrictions that most private plans impose. Yet Medicare comes with costs, including monthly premiums, deductibles, and copayments. Moreover, one key aspect about Medicare is that it doesn't put a cap on your out-of-pocket expenses, so you'll have to get either Medicare supplemental insurance or use a Medicare Advantage plan to put an upper limit on your theoretical liability for healthcare costs. Understanding your Medicare options is important to make the most of the program, and that requires some up-front advance research as well as ongoing monitoring.
Myth 3: Your tax bill will disappear in retirement
It's natural to think that once your paycheck goes away, your tax bill will disappear as well. Yet retirees often find that they are even more aware of taxes they pay than they were during their careers. Without the payroll withholding that typically takes care of tax liability for workers, retirees who take taxable distributions from IRAs, 401(k)s, or other retirement accounts often find that they have to make quarterly estimated payments in order to avoid IRS penalties. Moreover, with required minimum distributions kicking in for many accounts at age 70-1/2, those who were successful in accumulating extensive savings often find that their tax bracket doesn't go down in retirement. By using Roth IRAs and Roth 401(k) accounts during your career rather than relying solely on traditional retirement accounts, you can help to ease the tax burden after you retire and keep more of your retirement assets for yourself.
Myth 4: Annuities are never a good choice for retirees
Many investors have negative attitudes about annuities, and in some cases, it's for good reason. Some annuities come with high ongoing costs and tough restrictions that can lock you into contracts for years or else face paying large surrender charges. However, some annuities are good choices for retirees. Specifically, for those who need a constant stream of dependable income, immediate annuities or advanced life deferred annuities guarantee monthly payments that start either immediately or at a specified point in the future, and will last for the rest of your life. You shouldn't use your whole nest egg on such an annuity, but making it part of your retirement arsenal can be a good move.
Myth 5: Social Security will replace my work income
Most retirees rely heavily on Social Security for the money they need to pay living expenses. Yet Social Security was never intended to replace all or even most of your salary. For most people, Social Security replaces around 40% of pre-retirement income, with those who earned more during their careers getting an even lower percentage. If you want to be financially secure, it's important to go beyond Social Security to get other sources of income in retirement, whether it's from investments, part-time work, or other employee benefits you earned during your career.
Myths about retirement can trip you up at the worst time possible. By being aware of these myths now, you can take steps to avoid them and have a better retirement.