Retirement planning is one of your most important life tasks, and it's essential you make a realistic assessment of your financial picture in your later years. Unfortunately, far too many people believe some dangerous myths that could leave them woefully unprepared for life after leaving the workforce.
To make sure this doesn't happen to you, ignore these four major retirement myths forever.
1. Social Security is enough to support you
If you're counting on Social Security as your sole source of support, you'll be in serious trouble. The average benefit in 2021 is just $1,543 per month. Assuming your benefits are close to that amount, you'd be trying to live on only $18,516 per year. That's not nearly enough to meet your needs and provide a comfortable retirement.
2. You're going to spend less as a retiree
Many people also assume their spending will fall dramatically as a retiree, so they believe they can get by with a smaller amount of savings. Unfortunately, that's not necessarily the case. A substantial number of seniors actually increase spending in retirement, and their expenditures often stay higher over the long term.
Rather than assume you'll need to replace only 70% or 80% of pre-retirement funds, make an actual budget to get a clear idea of what you'll spend. Or if you're decades away from retirement and that's too hard to predict, err on the side of caution and assume you'll need enough income from savings and Social Security to match your pre-retirement salary.
3. The 4% rule ensures you won't run out of money
As a retiree, you'll need to choose a withdrawal strategy for how much you can safely take out of your investment accounts. Unfortunately, many people rely on the outdated 4% rule. This says you can take out 4% of your retirement account balance during your first year of retirement, and increase it based on inflation each year thereafter.
But the idea that you won't run out of money this way is a major retirement myth. With longer life spans and lower projected investment returns, there's actually a very real chance your accounts could run dry with this method of calculating withdrawals.
Rather than take that gamble, either use a lower fixed percentage when setting your distribution amount or follow the advice of the Center for Retirement Research at Boston College and set annual withdrawal rates based on tables prepared by the IRS to calculate required minimum distributions.
4. Medicare will cover all your healthcare costs
Lastly, far too many current and future retirees believe a dangerous myth that could leave them significantly underestimating what they need to save for healthcare services. And that is that Medicare covers everything you need.
In fact, Medicare has many exclusions, including hearing aids, dental care, and long-term care. There are also substantial out-of-pocket costs for prescription drugs, and 20% co-insurance costs for most routine medical care. Since Medicare isn't as comprehensive as you'd think, you may need a six-figure savings account solely for medical expenses throughout your later years.
The good news is, now you know that you need to plan for healthcare spending, anticipate higher-than-expected costs, and potentially reduce your projected withdrawal rate.
You can plan accordingly either by raising your retirement savings (if you're still working) or by making any necessary budget cuts. Either of these steps could be a challenge, but you can't live on Social Security and must have supplementary savings.