Please ensure Javascript is enabled for purposes of website accessibility

Don't Fall for These 3 Retirement Myths

By Maurie Backman - Updated Dec 17, 2018 at 1:18PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You can't believe everything you hear.

If you're not convinced that Americans as a whole are woefully unprepared for retirement, consider this: One-third of Americans have zero retirement savings whatsoever, while 31% don't have savings or a pension plan to fall back on. Worse yet, 28% of Americans over 55 have yet to start saving for retirement despite the fact that most people aim to reach that milestone between the ages of 60 and 65.

This collective failure to save can be partly attributable to life's ever-climbing expenses. It's hard to put away money for retirement when you're struggling to pay your mortgage, cover your healthcare costs, and put food on the table for your family. But then there are people who don't save for retirement because they actually believe they don't have to. Here are three common myths that support that line of thinking, and why you shouldn't buy into them for a second.

A retired couple sitting on a couch examining a piece of mail.

Image source: Getty Images.

1. You'll spend less
Many people assume their living costs will go down in retirement, but there's an equally good chance yours will stay the same or even go up. If you're a homeowner, you won't see a decrease in housing costs unless you've paid off your mortgage. Quite the contrary -- you might actually pay more to live in your home in retirement, since the older your property gets, the more maintenance and repair work it's likely to need. Plus, there's a good chance you'll see a rise in property taxes over time. And if you're a renter, unless you're willing to downsize, you can pretty much count on your monthly payment staying the same or increasing year after year.

Then there's medical care to factor in. According to Fidelity, the average cost of healthcare over a 20-year span for a 65-year-old couple retiring today is $245,000, and that doesn't include nursing home or long-term care. In other words, don't expect your medical expenses to go down as you get older, even if you're in remarkably good health.

Finally, there's the cost of basics like food to consider. Food prices have risen rapidly in recent years and are expected to outpace inflation in the near term. And according to data compiled by the Senior Citizens League, between 2000 and 2014, the cost of natural gas and electricity rose 180% and 50%, respectively. Even the cost of basic phone service increased by 37% in that same timeframe. Given the tendency of living costs to climb, there's no reason to assume that yours will magically decrease once you're no longer working.

2. You can live off Social Security alone
Many people assume that their Social Security benefits will be enough to sustain them in retirement, and that they don't need to worry about saving anything extra. In reality, Social Security is only designed to replace about 40% of your pre-retirement income. Since your living costs won't necessarily go down in retirement, relying on Social Security alone will leave you with a very noticeable 60% gap.

To put that in the context of real numbers, imagine you're used to bringing home $5,000 a month and are suddenly forced to live on just $2,000. Doesn't sound feasible, does it?

3. You won't have to pay taxes
Some people think they won't have to pay taxes in retirement, but in reality, many common sources of retirement income are taxable. If you have a 401(k) or traditional IRA, your withdrawals will be taxed as ordinary income. (Only Roth IRAs allow for tax-free withdrawals in retirement.) The same holds true for withdrawals you make from a pension plan. Additionally, if you have a traditional brokerage account with stocks, bonds, or other investments, you may be subject to taxes on your capital gains.

Then there's Social Security, which for some people does come tax-free. But if you have additional income, you may be taxed on a portion of your Social Security benefits. To determine whether you'll be taxed, you'll need to calculate your provisional income, which is your gross income (your total income not including Social Security) plus any tax-free interest you receive (such as that from municipal bonds), plus 50% of your Social Security benefits. If your provisional income is between $25,000 and $34,000 as a single filer, or between $32,000 and $44,000 as a joint filer, then you may be taxed on up to 50% of your benefits. And if your provisional income exceeds $34,000 as a single filer or $44,000 as a joint filer, you may be liable for taxes on up to 85% of your benefits.

While there's a world of good retirement advice out there, there's also enough misinformation floating around to make any would-be retiree's head spin. If you want a financially secure retirement, consider this your friendly wakeup call and plan accordingly.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.