Belief in Santa Claus is a healthy, long-standing and powerful tradition for many families that reinforces good values. Like the Tooth Fairy and the Easter Bunny, the Santa myth is fun and can help form a child's imagination.
Retirement myths are another story altogether. That's why it's important to avoid being misled by the growing number of myths that cloud the difficult task of preparing for and living in a financially comfortable retirement. The fact remains, however, that many people who are planning for retirement tend to rely on myths about their financial future. Believing can ruin their retirement once it actually arrives. It's time to grow up and stop believing in those retirement myths.
Here are some of the most common myths in retirement planning — and the reality you need to know to overcome them.
— By Jim Pavia, senior editor at large
Posted 5 November 2015
Myth: My expenses will be lower in retirement.
Reality: Out-of-pocket expenses will more than likely increase in retirement years. After all, people tend to spend more money when they have free time. A majority of retirees travel more in retirement and pursue hobbies that they didn't previously have time to enjoy. Finally, medical expenses will increase at a faster rate than they likely did during the pre-retirement years. That means a bigger financial impact on retirees.
Myth: I will pay fewer taxes when I retire.
Reality: While it's possible that you'll be in a lower tax bracket because you'll be making less, a more likely scenario is that you'll pay a higher percentage of your income to taxes after retirement. As you lose deductions and exemptions, your state and local taxes will continue to increase. Also, taking money out of retirement accounts, such as traditional IRAs and 401(k) plans, creates taxable income that can push you into higher tax brackets. Finally, you may qualify for fewer deductions than in previous years. If you pay off your home before retirement, that deduction is gone.
Myth: Long-term health care will be covered by my health insurance or Medicare.
Reality: Qualifying for Medicare doesn't mean that all your health-care costs will be covered. People often assume that if they have to go into a nursing home, Medicare will cover them, but most of the time that isn't always the case. And if it does, it will only cover you for a set amount of days. Many retirees rely on supplemental policies to cover co-pays, deductibles and other expenses that Medicare does not. Keep in mind: These policies (called Medigap policies) can be expensive.
Myth: I should collect Social Security as soon as I am eligible, at age 62.
Reality: When it comes to Social Security, it can be quite tempting to take the money and run. You've most likely been paying into the Social Security system for much of your working life, and you've made up your mind that it's time to receive the benefits you now feel you deserve. Also, a guaranteed monthly income is nice to have. However, delaying benefits until age 70 increases your lifetime benefits by about 8 percent a year. So if you start taking Social Security at 62 rather than waiting until your full retirement age, you will receive reduced benefits.
Myth: I need to get out of stocks when I retire.
Reality: Yes, investing your retirement savings in the stock market has risks, but stocks can actually help provide the long-term growth that retirees need to make their assets last longer. That is key, since a retirement could span several decades. The fact is, traditional pension plans are gone and have been replaced by 401(k) plans. That means individuals are now responsible for making their own smart asset-allocation decisions in retirement. Therefore, allocating at least a portion of your savings to a diversified stock fund can be an ideal way to continue grow your nest egg in those golden years.