Many Americans are on track to fall short of meeting conservative retirement savings targets. In fact, 45 percent of working-age households do not have money saved in retirement accounts, according to a report by the National Institute on Retirement Security.
If you’re one of them, or simply don’t think you have enough money saved up to live your American Dream comfortably after you stop working, it might be time to revisit some of your beliefs about saving money and investing.
From postponing savings contributions, to assuming you'll be fully covered by health insurance and Social Security, you’ll want to change some of your beliefs about money immediately — or risk jeopardizing your retirement savings. Find out the biggest retirement mistakes you're making that are actually myths.
Myth 1: It’s Too Late to Start Retirement Planning
While it’s a good idea to contribute to a retirement fund as early in your working years as possible, you can start putting away money for your nest egg at any age. One benefit of making contributions to a retirement account when you’re at least 50 years of age or older is your contribution limit increases. The IRS permits up to $6,000 in catch-up contributions for 401k, 403b, SARSEP and governmental 457b plans, as of 2016.
Myth 2: Medicare Will Cover My Health Care Expenses During Retirement
The total projected health care cost for a 65-year-old couple between the ages of 65 and 85 with Medicare coverage would be $266,589, as of 2015, reported HealthView Services, a provider of retirement health care planning applications. According to these projections, most couples can expect to spend $583 per month during their first year of retirement, but more than double that by the time they are 85 years of age. If you aren’t making a sincere effort to build up your retirement savings now, you might not have enough in the bank to cover even basic health care costs — even with Medicare.
Myth 3: I Can’t Make and Save More Money Without Working
If you think you need to maintain a part-time job or rely on another source of income to build up that retirement fund: Think again. You could buy a Multi-Year Guaranteed Annuity (MYGA) that will earn you a guaranteed amount of compound interest for a certain number of years.
Retirees might want to consider purchasing several smaller annuities over the course of several years, recommended personal finance expert Jonathan Clements in The Wall Street Journal. That could help you spread your purchases among multiple insurers to reduce your risk if one insurer has financial trouble, he wrote.
You could also buy a five-year MYGA, for example, for a lump sum payment of $75,000 that’s currently sitting in a low-interest savings account, to guarantee a steady stream of income for the next five years. This would help you build up your savings rapidly — and without having to clock in more work hours.
Myth 4: I’ll Make Up for Missed Retirement Savings Later
Maybe you’re waiting for a higher-paying job, attractive returns on stock investments or a financial miracle before you start building up that retirement savings account. Big mistake.
If you expect to generate any type of benefits from accounts that can earn you compound interest, you need to start saving as early as possible — as early as yesterday. Consider speaking with a financial advisor to learn about your best options for contributing to an interest-bearing account that can help you start earning money today.
Myth 5: I Can’t Make Risky Investments Right Before Retirement
You might not have a strong track record of success playing the stock market, but you can still generate attractive returns on certain types of investments as part of your retirement planning strategy. If you’re close to retirement, it’s likely that you don’t want to turn to high-risk, and high-yield, investments in the event the markets don’t perform well enough by the time you retire. At that age, you can afford to make some low-risk investments with a portion of your untouched savings.
One option is to participate in a lending platform where you loan money to small business owners or individuals, and earn an attractive return on your investment. This type of investment isn’t as low-risk as, say, a bank certificate of deposit, but it can help you generate some extra money for your retirement fund sooner than you think.
Myth 6: I’ll Be Able to Live on Much Less When I’m Retired
Maybe you think you don’t really need that much money to be happy, or you expect your cost of living to change drastically when you are retired. If this is your excuse for postponing or neglecting contributions to a retirement savings account, you could be setting yourself up for a big disappointment when you finally say goodbye to the paycheck.
Consider the effects of inflation and any changes in your spending habits in the next few decades. If you plan on traveling, moving to a new home or even relocating, it’s likely that you will need extra funds to make those dreams come to life. Also consider that your mortgage might not be paid off, or you acquire a new mortgage.
Housing accounts for 35.9 percent of average annual expenditures at age 75, according to a 2013 U.S. Bureau of Labor Statistics survey. That’s a significant number, no matter where you live.
Myth 7: My Spouse Will Manage My Retirement Funds When I Die
If you haven’t taken the time to draft a living will or outline exactly how you want your retirement funds — and any other financial assets you own — distributed upon your death, there is a risk that your significant other might not see your hard-earned dollars.
Make sure you’ve taken the time to consult with a financial planner to put together clear instructions for the divisions of assets and information pertaining to your funeral and final wishes. Some of your retirement savings could be used to set up a funeral trust or donated to a charity or fund of your choice, according to the American Institute of CPAs.
Myth 8: My Health Insurance Will Cover Me if I Get Very Sick
If you are diagnosed with a critical illness or get into a serious accident, your health insurance policy might deny certain claims or only partially pay for health care expenses. If you have an Obamacare plan, you could be paying anywhere from $2,403 to $6,639 in out-of-pocket health care costs, according to HealthPocket, which ranks and compares health care plans.
Being diagnosed with cancer or other serious health conditions means you could also be paying for many medical services not covered by your Obamacare plan. If you don’t have money set aside for medical or health emergencies — or some type of critical illness insurance plan that covers all costs upon diagnosis — you might end up struggling with medical debt for years to come.
Myth 9: I’m Too Young to Be Thinking About Retirement
Baby boomers and soon-to-be-retirees typically have retirement planning at the top of their agenda. But millennials and younger generations should also make it a priority.
If you expect to build up a substantial retirement fund a few decades from now, your best bet is to start early. Putting away a percentage of your monthly income into a retirement fund as early as 30 years of age means you can take advantage of several years of compound interest — and with little to no risk. Bottom line: It’s never too early to start saving.
Myth 10: I’ve Been Contributing to My 401k for Years, So I'm Fine
If you’ve been taking advantage of automatic enrollment for a 401k plan through your employer and sticking to the default rate, you’ve probably been contributing about 3 percent of your income toward that retirement fund. However, this isn’t enough to really build up a retirement savings account that will help you live a comfortable and carefree life.
Wade D. Pfau, professor of retirement income at The American College, recommended a 15 percent contribution rate for a 35-year-old who plans to retire at 65 years of age, according to InvestmentNews.com.
Myth 11: I Have Other Financial Priorities
Buying a home, paying for college or paying off student loans and credit card debt might appear to be higher priorities right now, depending on your age and life stage. However, retirement contributions need to be a part of your financial plan, regardless of where you are financially.
Even if you are only making a modest 1 percent contribution, that’s money that is going toward your future. Keep in mind that many retirement savings accounts are tax-deferred, so you can “protect” this money from income taxes as you build your future.
Myth 12: The Market’s Not Doing Well Enough for Me to Invest
You don’t need to wait for perfect market conditions to build up your retirement funds. Although some people do wait for signs of a strong economy before pursuing higher-risk investments as part of their retirement portfolio, you still have plenty of options with very low-risk investments. At the very least, you could be putting your money into mutual funds that will slowly and steadily build up your savings.
Myth 13: Social Security’s Got Me Covered
You’ve been seeing a chunk of your paycheck going toward Social Security month after month, a benefit that could provide you with one source of income when you stop earning money. However, Social Security has been having trouble since the Great Recession.
The Washington Post reported that the Social Security Administration started tapping into U.S. Treasury funds back in 2010 because of the recession. The SSA also reported that it expects a significant cash flow deficit in the very near future. However, even if Social Security exists when you retire, there might be benefit cuts, or the amount you receive simply might not be sufficient to support you in retirement.
Myth 14: I’ve Already Saved Money for Health Care Expenses in Retirement
Increasing health care costs across the board mean you could be setting yourself up for financial struggles come retirement — especially if you haven’t set aside enough money for one of your biggest expenses: long-term care. Long-term care costs are not covered by health insurance, according to Frank Armstrong III, founder and principal of Miami-based Investor Solutions, in Forbes.
You will need, on average, up to $84,000 per year to pay for long-term care, and 70 percent of people turning 65 will need some form of long-term care, according to the U.S. Department of Health and Human Services. This is one cost you don't want to underestimate when planning your retirement.
Myth 15: I Won’t Live Long Enough to Enjoy My Savings Efforts
If you’re holding off on long-term planning because you think you simply won’t live long enough to enjoy your savings and wealth-building efforts, you might be compromising on a comfortable future. Today’s retirees and the next generation of retirees are expected to live longer than previous generations — the CDC reports the average American will live to 78.8 years — which means you need to plan for at least 13 years of thriving beyond retirement.
This article was originally published on GOBankingRates.com.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
