Many people think they've planned well for retirement, only to run into financial troubles later in life. If you want to avoid financial stress as a senior, it's important that you not believe these dangerous myths.
1. You can live on Social Security alone
Many people neglect to save for retirement because they're confident they can fall back on Social Security during their senior years. But here's a news flash: The average senior on Social Security today collects just a little over $18,000 a year in benefits.
Now, think about your current expenses. Many of them will still exist once you retire, and chances are, $18,000 and change won't be enough to cover them.
In fact, generally speaking, Social Security will replace about 40% of your salary if you're an average earner. Most seniors, however, need more like 70% to 80% of their former earnings to keep up with their bills, so rather than depend on Social Security alone, make an effort to build some independent savings in a 401(k) or IRA. Contributing even $100 a month could leave you with several hundred thousand dollars in retirement savings if you fund your account for many years and invest your money wisely.
2. Medicare is free
Many people assume that their healthcare costs will decline in retirement thanks to Medicare being free. But while Medicare Part A, which covers hospital care, is indeed free for most enrollees, Parts B and D, which cover outpatient care and prescriptions, respectively, charge a monthly premium for coverage. Furthermore, Medicare enrollees are subject to copays, deductibles, and other out-of-pocket costs, as well -- Medicare doesn't cover all health services in their entirety.
In fact, Fidelity estimates that the average 65-year-old couple today will spend a total of $295,000 on healthcare throughout retirement, not including long-term care. It's for this reason that you must allocate savings to future healthcare costs -- whether by padding your 401(k) or IRA or contributing money to a health savings account that you reserve for your senior years.
3. Retirees don't pay taxes
While it's true that some people get relief on the tax front once they enter retirement, seniors are by no means off the hook when it comes to paying the IRS. Not only are Social Security benefits taxable in some cases, but unless you have a Roth savings plan, your 401(k) or IRA distributions will be subject to taxes, as well. And if earning money from investments outside of a 401(k) or IRA, you'll need to pay taxes annually on that income, too. Therefore, don't be fooled into thinking taxes won't eat up a chunk of your money in retirement, because unfortunately, they probably will.
The more you read up on retirement costs, the better prepared you'll be for that milestone. Be sure to start mapping out a plan for your senior years well before retirement rolls around. That way, if you discover surprising information that throws your plan off course, you'll have ample time to shift gears and recover.