3 Retirement Savings Myths You Can't Afford to Believe
KEY POINTS
- Don't assume you have to be a high earner to build savings.
- Don't keep your nest egg solely in cash.
- Don't limit yourself to tax-advantaged accounts that are restrictive.
The average American has $89,300 saved for retirement, according to data from Northwestern Mutual. But no matter what savings target you're aiming for, it's important to come up with a solid strategy. And if you want your strategy to work, you'll need to steer clear of these potentially dangerous retirement savings myths.
1. You need to earn a lot of money to build a large nest egg
Those people you hear about who manage to retire with a $1 million nest egg? They're not all six-figure earners. Many people who retire wealthy were modest earners who simply prioritized their savings from a young age so they were able to build up large IRA or 401(k) balances over time.
Let's say you earn $40,000 a year. You're probably not going to be setting aside $5,000 to $10,000 a year for retirement. But maybe you can save $2,000 this year, or 5% of your salary, and then save $2,500 next year as your wages increase. Over time, those contributions could add up nicely.
2. A regular savings account is the safest place for your money
Many people worry that investing their money might lead to losses. If you have similar concerns, you may be inclined to keep your retirement funds in a regular savings account. But doing so could mean falling short of your retirement savings goal.
Over the past 50 years, the stock market's average annual return has been 10%, as measured by the S&P 500 index. Meanwhile, the 4% to 5% interest rates high-yield savings accounts are paying today aren't the norm. You might only average 3% in a savings account over time, or even less.
Meanwhile, let's say you manage to save $200 a month for retirement over a 45-year period. At a 10% average annual return, you're looking at a nest egg worth over $1.7 million. At a 3% average annual return, you're looking at more like $223,000.
3. You should keep all of your retirement savings in an IRA or 401(k)
The benefit of saving for retirement in an IRA or 401(k) is getting a tax break in the process. Contributions to traditional IRAs and 401(k)s are tax-free, so by putting $2,000 a year into one of these accounts, you make it so the IRS can't tax $2,000 of your salary.
But in exchange, IRAs and 401(k)s require you to leave your money alone until age 59 1/2. If you take a withdrawal at an earlier age, you'll generally face a 10% penalty. And that's why it's best to keep some retirement savings in a separate account.
If you save a portion of your nest egg in a regular brokerage account, you'll have investments you can cash out at any time without penalty. This might, for example, give you the option to retire at age 57 if you've saved enough money to do so rather than have to wait until 59 1/2 to avoid penalties.
Saving for retirement is something that takes a world of effort and commitment. So it's important not to fall victim to these myths that could lead to some pretty poor choices on your part.
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