5 Retirement Savings Myths To Unlearn

There’s no one-size-fits-all method when saving for retirement. To save appropriately, you need a tailored, custom plan that suits your needs long-term. Much of the advice you find online will be full of generalizations that could lead you to accept financial myths as truths. However, to have a successful retirement savings journey, it’s a good idea to unlearn some of these false ideas. Let’s look at some critical retirement myths that don’t stand the test of time.

1. You Should Base Your Saving (and Spending) Plan on the 4% Rule

If you’ve received financial advice from friends or family, you’ve likely heard of the 4% rule. The rule states you can withdraw 4% of your retirement investments annually (adjusted for inflation) to cover your living expenses for the year. For example, if your total savings at retirement are $2 million, you would withdraw $80,000 in your first year of retirement and adjust that number for inflation in the following years. While the 4% rule may set a helpful baseline, it's not a hard-and-fast rule. It was created to work under set circumstances based on factors such as life expectancy, asset allocation, risk, and geographic location. For some people, withdrawing 4% may be too much; for others, it could be too little. If you plan on retiring in Palm Beach or San Diego, you will have to factor in the rapidly rising cost of living and take a higher percentage of your retirement savings than if you want to retire somewhere with more stable living costs. Whatever your retirement dreams, we can work together to create a retirement savings and withdrawal strategy that maximizes your assets today and tomorrow.

2. Medicare Will Cover All (or Most) of Your Healthcare Needs

Unless you're still working and covered under a qualified plan, odds are you’ll need to enroll in Medicare. Unless you qualify for an exception, the earliest you can enroll is 65. While Medicare will certainly help cover some healthcare costs in retirement, it isn't as comprehensive as you might think. First, Medicare has several parts.

• Original Medicare (Parts A and B) covers inpatient and outpatient care. While most people don’t pay premiums for Part A, part B does carry a monthly premium that can increase based on your income—Medicare IRMAA.

• Part C, often referred to as a Medicare Advantage Plan, allows you to receive coverage from private healthcare providers, offering flexibility and more comprehensive coverage than Original Medicare. However, Part C plans almost always require additional premiums and do not exempt you from paying for Parts A and B.

• Part D provides prescription drug coverage. It is either a standalone plan or covered under your Advantage Plan.

• In lieu of an Advantage Plan, Medigap/Supplement Plans offer supplementary insurance to help cover the gaps in Original Medicare. 

Each of these parts comes with its own out-of-pocket costs, coverage limits, and more. Plus, one of the most significant expenses Medicare doesn’t cover is long-term care, which is something about 70% of people over 65 will need. How can you prepare for these extra costs?

• Consider a long-term care insurance policy. 

• Max out your HSA (as long as you’re eligible).

• Bake your healthcare expenses into your retirement budget/spending projection.

3. You'll Spend Way Less in Retirement

So, you think you’ll spend less in retirement? You might want to think again. Many retirement experts advise people to plan on replacing about 90% of their pre-retirement income. Why? Because contrary to popular belief, spending doesn't go down all that much in retirement, especially in the first few years. Think about your current lifestyle. 

• What do you actually spend in a month/year?

• What is your ideal retirement lifestyle plan? 

• Do you plan to downsize or cut spending in retirement? If so, how?

You may think you’ll spend less until you have your first grandchild and spend more money flying to visit, buying them presents, or helping with college funds. Additionally, healthcare is an area where you'll likely spend far more than in your pre-retirement years. As you get older, the likelihood increases that you may need expensive medications or long-term care.

4. Social Security Will Be Your Largest Income Source

The days of getting by on monthly Social Security checks are long gone. In fact, Social Security only covers 40% of pre-retirement income for the average retiree. Though Social Security can only fund a part of your retirement income, there are several ways to maximize benefits:

• Accrue delayed retirement credits. The longer you delay taking payments past your full retirement age, the more credit you earn to increase your total benefit amount. By waiting, you can permanently increase benefits by up to 8% per year. You stop accruing these credits at 70.

• Collecting at full retirement age (FRA). If waiting to receive benefits until 70 isn’t possible, consider holding out until your Full Retirement Age to begin taking payments. That way, you can access 100% of your primary insurance amount (PIA) or total benefits. 

• Work longer. The Social Security Administration bases benefits on your 35 highest-earning years. Since you tend to earn more later in your career, working even an extra year can significantly impact your total benefit.

Even by maximizing your benefits, Social Security is only one piece of the retirement funding puzzle. You can work with your financial advisor to make sure you have a well-rounded portfolio of investments to help fund the retirement lifestyle you envision.

5. Stock Market Returns Are Your Biggest Risk

Many people think the fate of stock market returns poses the most significant threat to their grand retirement plans. But that's not the full story. Yes, the markets have been in the news a lot (and they'll likely continue to be). Keep in mind that while there will be market volatility, long-term returns will remain relatively stable. So, if you shouldn’t stress about returns, what is your biggest risk? Not planning for longevity. Many people underestimate how long they will live in retirement. It’s critical to plan for a longer life than you think, which means more savings for lifestyle, healthcare, insurance, taxes, and more! Your financial advisor can help you mitigate risks and make a smart retirement plan tailored to your lifestyle. Reach out today.