Retirement Savings Money Myths That Could Leave You Broke

In the Great American Story, retirement is something that is waiting for all of us. One day we will reach the end of our working  years, and ride off into the sunset funded by our healthy retirement savings and a fat Social Security check.

The reality is very different. Right now, 41% of Americans say it will be a “miracle” if they are financially secure in retirement, according to the Natixis Global Retirement Index. COVID had a huge impact on people’s ability to keep saving for retirement. A lot of people, especially in younger age groups, found themselves drawing on retirement accounts just to make ends meet when they faced unemployment. 

But COVID and a whipsawing economy aside, there are also common misconceptions about money that keep Americans from taking the necessary steps to set aside enough to be financially stable in retirement. Here are the top money myths that might be holding you back from preparing fully for retirement’s tomorrow.

MYTH: It’s Too Late to Save Enough Retirement Savings

Trying to save $1 million or more for retirement when you have a late start can feel overwhelming. The truth is, an underfunded retirement is a norm, not the exception. Rather than giving up on achieving a set dollar amount by the age of 65 (or your preferred retirement date), begin by increasing contributions today, even if it is by a small amount. Adding just 1% every year to current contributions can add up over a decade or more. Over a 40-year period, your savings could nearly triple.  

Today’s seniors need more for retirement than any other generation. They also have less help from employers, through pensions, and must rely more on personal savings. Other factors which increase the amount of savings required include the rising cost of living, higher health care costs, and longer lifespans. To maintain your quality of life, it is not uncommon to need enough money to fund 30 years or more in retirement. 

But don’t let yourself be held back by the notion that it’s too late. Remember that even small, regular contributions add up and collect compounding interest over time, even just a handful of years. And if you’re still not convinced, read this amazing story about how one woman saved $1 million after the age of 65. 

MYTH: Medicare Will Cover Health Care Costs

At 65 you qualify for Medicare, a free, government-funded health care program for seniors. It may feel like a huge relief not to pay insurance premiums anymore, but keep in mind that Medicare covers only about 80% of healthcare costs. Supplemental insurance plans help to cover some, but not all of the other 20% of medical costs. 

In general, people aged 65 and over will spend about 20 percent of their total annual income on health care expenses. Seniors must pay out-of-pocket for premiums, prescription drugs, deductibles, and excluded care. Most policies do not provide coverage for vision, hearing, dental, or long-term care needs. 

One report estimates that a healthy 65-year-old will spend more than $400,000 on health care expenses — and that doesn’t include long-term care, which can be $100,000 or more. To stretch retirement dollars, evaluate your coverage needs, and be sure to include a plan for long-term care, as 72 percent of Americans will require some kind of long-term care in their later years. 

MYTH: Social Security Will Pay for Retirement

Social Security was not designed to pay 100% of the costs of retirement. It was meant to keep seniors out of poverty. With the average payment of only $1,544.70 per month in 2021 and rising debt among retirees, the total annual payout of $18,500 per year is not enough to live comfortably in most parts of the country. 

If you find yourself short on retirement savings, it is possible to delay Social Security payments until age 70, which will raise your payout by approximately 8% for each year you wait.  

MYTH: You Will Need Less Money and Savings in Retirement

Living on 50 – 60% of current income after retirement is a less realistic figure today because people in general are not entering retirement with no debt or housing costs. In addition to carrying debt into retirement, the two biggest factors in retirement costs are longevity and rapidly rising health care costs. The Employee Benefit Research Institute recently determined half of the retirees spend 95% or more of pre-retirement income during retirement. Fully replacing income for 20 plus years in retirement takes planning across the long term.

MYTH: Contributing to a Work Retirement Account Is Enough

To help workers save, many employers now auto-enroll new employees into the workplace retirement plan. The problem is that most company policies begin contributions at very low percentages, which can provide workers with a false sense of security. Funding retirement requires you to set aside more than 1 to 3% of current income. It is a good starting point, but not the only savings required. 

One popular strategy is to raise contributions at least 1% each year and contribute to an individual account (IRA) when possible. In addition to making regular monthly contributions, consider diverting bonuses and financial windfalls into retirement accounts. Those extra payments can significantly ramp up savings. 

The amount you should contribute each month will depend on several factors, including your current age, the current level of savings, when you plan to retire, and what lifestyle you want for your retirement years. 

MYTH: You Have More Important Financial Obligations

The financial pressure to pay current bills can derail the best savings plans. You might struggle currently with credit card debt, student loan payments, building an emergency fund, eliminating the mortgage, or helping adult children. Each financial goal is an important part of your overall financial plan.  

However, postponing retirement contributions will leave you with less money at a time when it is harder significantly harder to find employment to make up the difference between income and financial needs. 

MYTH: You Will Not Live in Retirement Long Enough to Enjoy the Savings

Today, the average person lives to between 75 and 85 years old, with half living longer. The Social Security Administration estimates that one in four will live past age 90 and 10% will live beyond 95. Financial planners recommend planning to pay for at least 30 years in retirement at 95 – 100% of current income, to ensure you do not run out of money. 

Conclusion

Running out of money in retirement typically means living in poverty and/or significant debt, or relying on grown children for support. Building retirement savings is a key aspect of financial planning because you cannot borrow your way through retirement. 

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