5 Myths About Retirement Financial Planning
Why some things you've heard may not be true for you
(Editor’s note: This content is sponsored by Acts Retirement-Life Communities.)
Planning for retirement is of the utmost importance. After all, you need to ensure you have enough financial resources to enjoy yourself. Yet there’s a lot of uncertainty and doubt about just how much you need to save and how you should be saving, especially in the pandemic, leading to the rise in a number of myths about retirement financial planning. Here are just a few of the most common ones that you need to look out for, as well as their actual reality.
Myth: You Need to Save X Number of Dollars Before You Retire
Human beings are complex. They have varying needs and wants, and that extends into their retirement plans. That’s why saying that you need to hit a specific dollar amount before retiring is too arbitrary; if you’re the kind of person who wants to live a modest retirement, your annual expenses are going to be much lower than someone who wants to live more extravagantly. All you need to do is to save enough to maintain the lifestyle you desire, and that’s something you can’t put an all-sizes-fits-all number on.
So here’s what you do: decide the type of retirement life you want to have. Is it daily tee times? Or, is it settling into a retirement community and enjoying the amenities and activities already provided at no extra expense? Start there — with your retirement plan — before determining how much you need to make it happen.
Myth: You’ll Only Have 70% to 80% of Your Pre-Retirement Expenses
Here’s another income myth that never seems to go away. It’s not uncommon to hear that, because you’re no longer paying payroll taxes or making 401(k) contributions, you’ll have some extra income as a result. Yes, you won’t be owing payroll taxes or making 401(k) contributions, so those expenses are gone. And this can be amplified further by downsizing your home, removing extra maintenance, energy, and other costs. But let’s not forget that your lifestyle isn’t necessarily staying exactly the same, either. Perhaps you intend to travel more now that you don’t have a 9-5, or can finally dive back into some long-lost hobbies. Those are going to add to your budget at the same time your previous expenses dissipate.
This is why it comes back to planning for the type of retirement you want, and ensuring all aspects are covered. Now that you aren’t commuting you may save on gas, tolls, and car care, but maybe you also intend to buy a boat to spend your retirement fishing. Your expenses just increased instead of decreased. So maybe sell the car? The point is: think about it in advance.
Myth: All You Need to Do is Max Out Your 401(k) Contributions to Save for Retirement
Let’s be clear: a 401(k) is a great retirement savings plan. It builds wealth while also reducing your taxable income as you save. Yet even maxing out your contributions every year isn’t going to get you as far as you think; as of this writing, 401(k) contributions are capped at either $19,500 a year for investors under age 50 or $26,000 a year over age 50. Considering your salary will shift to Social Security (and if you’re really lucky, a pension), you’re simply going to need more than your 401(k) if you want to maintain your current standard of living or something close to it.
That means diversify your retirement savings, such as a brokerage account, to supplement.
Myth: Haven’t Saved Enough? Just Keep Working!
Not all of us are workaholics interested in working well beyond age 65. But some of us have been led to believe we’ll have to in order to afford retirement. Yes, you can absolutely get a part-time job, either to supplement some income or to keep busy and engaged, or both. But with increased health concerns as we age, and volatile job environments for those seasoned workplace vets, the better option is to save more earlier, be it higher 401(k) contributions or elsewhere, so that when you reach retirement age, you can actually retire if you want.
Myth: Conservative Investments are a Must During Retirement
We get it: retirement hits and you’re on a fixed income. You have what you have and not a penny more. It’s common to feel like your retirement success is tied to market volatility much more than it was before you retired. It’s scary to tap into your financial reserves after you’ve been relying on your work income for decades. It’s become therefore “conventional wisdom” to invest heavily in more conservative investments like bonds, but these aren’t always the best choice. The truth is that with people on average living longer, retirement portfolios need to last longer as well — and conservative investments like bonds can often provide yields that are simply too low to maintain your lifestyle for as long as you need. That’s why you may want to remain diversified longer. Of course, you should consult with a licensed financial adviser being making any such decisions.
The Last Word on Financial Planning and Investment Advice
Hopefully this article has shed some light on common beliefs that are actually myths, or at the very least may not be accurate for your particular circumstance. Appropriately planning for retirement requires you to seek out investment advice that’s tailored to your specific circumstances and goals. With each person’s needs, earning capacity, and desires completely different, there are no easy answers, no set thresholds to hit that will guarantee success, no perfect, fool-proof formula that you can follow without fail for a comfortable retirement. Instead, you’ve got to do the work yourself, and do it as thoroughly as possible, if you want to ensure you have enough savings for retirement.
Additionally, there’s no guarantee that you’re going to need the same amount of savings from one year to the next. If you get a pension, or you inherit property or resources from a deceased relative, all of these events will change your requirements and the way you need to prepare for retirement; likewise, the lack of these circumstances will alter them further. This is why you can never take any broad-based retirement planning with anything but a grain of salt without first really examining it and understanding why the advice may or may not work for you. The retirement finance landscape is under nearly constant flux, so always seek the help of a qualified and experienced financial planner for the best advice!
For more information on retirement, read these articles by Acts Retirement-Life Communities:
- Retirement Myths vs Reality: What You Need to Know
- Surprising Retirement Facts
- Does a CCRC Make Sense for You?
Acts Retirement-Life Communities is the largest not-for-profit owner, operator and developer of continuing care retirement communities in the United States. Headquartered in suburban Philadelphia, Acts has a family of 23 retirement communities that serve approximately 8,500 residents and employ 6,200 in Pennsylvania, Delaware, Maryland, North and South Carolina, Georgia, Alabama and Florida. For more information about Acts visit actsretirement.org.