This week's episode of Just Don't Lose The Money Radio discussed myths about finances in retirement. Below are five of those myths that they touched upon. Make sure to listen to the podcast to stay up to date with all the information they discussed on the show!
Myth #1 - Your Expenses Will Go Down In Retirement
A lot of pre-retirees assume that their monthly expenses will be lower in retirement - the house is paid off, taxes will be lower, you don't have to fill up the gas tank every week for commuting to/from work, etc.
The general rule of thumb is that pre-retirees should assume they will need 80% of their current spending budget as their retirement expenses, but that is generally not the case. People often forget that In retirement, EVERY DAY is a Saturday, and everyone is different.
It is important to sit down and figure out what your current expenses are (essential, and then lifestyle), and what your income sources are - do YOU know what those numbers are?
Myth #2 - When You Retire, You Can Live Off Social Security
When you run the numbers, not too many people can live solely off of social security. We used to consider social security as part of the "3-legged stool" of retirement income. Social Security is just one of those legs.
The three legs of the retirement income stool include a pension, your personal savings, and then social security. If you are expecting to be able to live off of social security alone, you may be severely limited in your income in retirement.
People often forget that in 1940, when social security was first introduced, it was DESIGNED to be used as supplemental income, AND, life expectancies in retirement weren't nearly as long as they are today.
Again, everything comes back to knowing what your expenses are, and what your income sources are going to be in retirement. Not sure what your social security income will be? You can calculate your social security income by clicking here.
Still think you could live off of social security income alone?
Myth #3 - When You Retire, You Will Be In A Lower Tax Bracket
If you have the majority of your money in a tax-deferred account (like a 401k), you still have to pay taxes on that account as you start to withdraw from it. Plus, you may have lost some valuable tax breaks such as the mortgage interest deduction if you’ve recently paid off your home.
Myth #4 - Your Retirement Probably Won't Be That Long
In 1960, a 65-year-old man was only expected to live an average of 13 more years, while a 65-year-old woman had an average remaining life expectancy of 17 years.
Today (2019), A 65-year-old can expect to live another 19 to 21 years, on average, according to the Social Security Administration. What's more, the government agency says 25% of 65-year-olds can expect to reach age 90, and 1 in 10 will live beyond the age of 95.
And while people are living longer, healthier lives in retirement, health care costs and other living expenses may rise while in retirement, which is another expense you should consider budgeting for before you start your retirement.
Myth #5 - In Retirement, You Should Be Out Of The Stock Market, And You Should Stay Away From Annuities
Life is about balance, and your retirement portfolio should be the same way. Defining your goals should be the first step in analyzing your retirement strategy. Most strategies center on cash flow, growth or some combination of the two.
After you define what you want your portfolio to do for you and how that might change over time, it’s important to define the length of time over which you can make investments before needing access, which often relates to your life expectancy or those of your beneficiaries.
Ready for retirement?
While there is no “best way” to plan for retirement, these six action items will help you as you head to a chapter of life that you’ve never been in before. The mistakes you can avoid now can make all the difference between the retirement you deserve, and the one you have to settle for.