7 Myths About Finances in Retirement

Do you subscribe to one of these myths about retirement and your money?

When it comes to your retirement, do you have certain expectations already defined in your mind, or do you already picture your retired lifestyle in a certain way? Or maybe you are young and you have absolutely no idea what your life may look like once you retire? Either way, it’s important for you to get a firm grasp on what your financial future will look like once you do make the decision to exit the workforce.

Retirement is a brand new phase of life that instigates so much change for your finances. You already know you will no longer have that bi-weekly paycheck, but there will undoubtedly be some other surprises when it comes to you finances… things that you might not have expected. That certain lifestyle picture in your head might have led you to believe one of the common myths about finances in your retirement. They’re described in detail below.

By Rachel Hartman

1. Medicare will cover everything. You become eligible for Medicare the month you turn 65, but it’s important to remember there will still be ongoing health care expenses. “Medicare only covers some services for free,” says Jennifer Myers, a certified financial planner and president of SageVest Wealth Management in McLean, Virginia. Unless you qualify for Medicaid, you’ll need to budget for costs such as premiums, copays and deductibles.

You’ll also likely need a Medicare supplement plan, which can be affordable but not free. And keep in mind Medicare only provides some coverage for long-term care. You may want to think about purchasing long-term care insurance to help pay for additional services.

2. I will only need 70 to 80 percent of my pre-retirement income. While your list of expenses won’t include job-related costs like an office wardrobe and commuter expenses, it could easily be filled with other items. You may find you want to spend money on activities such as traveling, eating out, going to the theater or taking up a new hobby. “People are healthier and more active in today’s society than generations past,” Joseph says. “This means they need more money to go out and do what they would like in their retirement.”

3. Taxes will nearly disappear in retirement. Since you’re no longer bringing home a paycheck from working each month, it can be easy to think that taxes will decrease in retirement. Even though taxes can fluctuate greatly depending on where you live and your overall financial situation, you’ll likely need to plan on paying taxes each year.

Some states exempt pension and Social Security payments as taxable income, but they’re still largely subject to federal taxes. Another factor to consider is the amount you have in qualified retirement plans, such as IRA and 401(k) accounts. “Distributions from these accounts are generally fully subject to ordinary income taxes,” Myers says.

4. Downsizing will lead to further savings. A common retirement transition plan involves moving out of the family home and into a smaller place. You might assume this shift will lead to fewer home-related costs, but that’s not always the case. For example, if you move from a large home in the suburbs to a smaller place downtown, you may find the new urban location to be more expensive.

Some retirees come to regret the shift to smaller spaces, as it can be difficult to host family gatherings and accommodate grandchildren. And it can be pricey to move back into a larger home if you regret downsizing. “Reversing a house downsize will inevitably be costly, and retirees may find themselves buying back into an expensive suburban market that they had previously sold out of,” says Michelle Herd, senior client advisor at TFC Financial Management in Boston.

Rather than selling quickly, take some time to consider your lifestyle before downsizing. “This provides some flexibility in terms of getting to know how time in retirement will be spent, where it will be spent and with whom,” Herd says.

5. $1 million will provide a comfortable retirement. For years, building a $1 million nest egg was often considered a solid goal for retirement. However, that figure may no longer be accurate, due to longer life expectancies, increasing costs and active lifestyles. “There’s no one-size-fits-all amount of how much to save for retirement,” Myers says. “If you’re accustomed to a frugal lifestyle or you’ll be receiving a healthy pension, $1 million may be plenty to live on. If not, there’s a high chance it could be inadequate.”

6. I can withdraw 4 percent each year from my portfolio. The 4 percent rule refers to the concept of withdrawing 4 percent from a retirement account each year. The idea is that by following this strategy, you’ll be able to maintain a steady stream of income while keeping the funds sustainable for decades. “This may have been a reasonable standard in years past, but with increased life expectancy and recent challenges, many folks are largely underfunded for retirement,” says Tom Terhaar, an investment consultant with Conrad Siegel, a mid-Atlantic investment advisory firm. “Going forward, if individuals continue to subscribe to this rule, they may find themselves short of their goals.”

A better approach may be to consider withdrawing a lower percentage, such as 3 percent, each year. Talk to your financial advisor to fully evaluate your situation and determine the amount that will work best to cover your needs and sustain funds. You may also want to consider taking on part-time work to help avoid the risk of withdrawing too much from your portfolio during the early years of retirement.

7. I’ll save money by aging in place. Once you’ve settled in the home where you want to spend your retirement days, it may seem that avoiding a move to an assisted living center or nursing home will lead to substantial savings. Yet there could also be plenty of expenses to stay in your place and receive the right level of care. You might need to make modifications, such as putting in a bedroom on the main floor, adding a wheelchair entrance or bringing in home aides to help with cleaning or overseeing a health condition. “While you may be saving money by staying in your home, you could be spending even more on the care front,” Myers says.

So, which of these myths were you a believer of, and how has your view changed now? Or is there something else you can think of that wasn’t on the list? Let us know in the comments!

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The One Dangerous Assumption Made By 70% of Baby Boomers

Don’t put your retirement at risk with this assumption.

It’s an unfortunate fact that many older Americans who are still in the workforce are in danger of not having enough money to last them in retirement. In fact, just over half of all Baby Boomers actually have money put away for retirement, which is a pretty low number! The assumption made by many in this generation is that Social Security benefits will see them through their golden years. This, unfortunately, is not the case.

Social Security was never designed to be a program that would sustain retirees on its own, without any other income. If you’re of the mindset that you’ll be able to make it work without money coming in from any other source, you may be putting your retirement at risk

By Maurie Backman

You can’t live on Social Security alone.

Countless seniors enter retirement with inadequate savings and wind up living in poverty. The reason: They expect their Social Security benefits to pick up the slack, which they’re just not equipped to do. Those payments, in a best-case scenario, will replace about 40% of the typical worker’s pre-retirement income. Most folks, however, need twice that amount to live comfortably, and that doesn’t mean trekking the globe during retirement, but rather, enjoying a modest existence.

Why the disconnect? It really boils down to a glaring lack of knowledge, but the sooner more workers acknowledge that, the more motivated they’ll be to take action.

If you’re still not convinced, here’s some data: Almost one-third of baby boomers expect to need an annual income of $45,000 to $75,000 during retirement, according to the IRI. But the average Social Security recipient today collects just over $1,400 a month in benefits, which translates into just under $17,000 per year. And that’s way off the low end of the aforementioned range.

Even if both you and your spouse worked, and are therefore entitled to two sets of benefits, you’re still only talking about $34,000 a year, on average. And given that could cost the typical 65-year-old couple today $20,000 a year over a 20-year retirement, that’s not a lot of income to work with.

If you’re an older worker who’s lacking savings, let this be your wake up call: Social Security won’t cover your basic bills once your retirement savings run out, so if you’re behind on building a nest egg, now’s the time to act.

Salvaging your retirement

If you’re reading this and know you have only a handful of working years left with limited savings, you may be starting to panic. Don’t. You have several options to boost your nest egg, even if you’re already counting down the months until retirement.

For one thing, take advantage of catch-up contributions. Whether you’re saving in an IRA or 401(k), both plans offer this option. In the case of the former, you get a $1,000 catch-up if you’re over 50, bringing your total annual contribution limit to $6,500. If you have access to an employer-sponsored 401(k), you have an even greater opportunity to make up for lost time, as those 50 and over get a $6,000 catch-up that brings their annual contribution limit up to $24,500. This means that if you’re able to cut enough expenses to max out a 401(k) for five years, you’ll have an additional $122,500 to work with in retirement, and that’s not even taking investment growth into account.

Another option: Work a bit longer. Doing so will help you in a number of ways. First, it’ll give you a greater opportunity to save, but just as important, it’ll prevent you from tapping your nest egg earlier, thus stretching the money you’ve already socked away.

Working longer can help raise your Social Security benefits, too. For each year you delay your benefits past full retirement age, you’ll boost them by 8% up until you turn 70. This means that if you’re entitled to $1,400 a month at a full retirement age of 67 but hold off until age 70 to collect, you’ll receive $1,736 a month instead for life. Of course, that still won’t put you in a position to live solely off Social Security—but it’ll help.

Finally, be prepared to work in some capacity during retirement, whether it’s starting a new business or consulting in your former field. Putting in just a few hours each week could help you avoid financial struggles.

No matter what steps you take to prepare for the costs of retirement that lie ahead, don’t make the mistake of thinking you’ll get by on Social Security alone. Those benefits, though helpful, won’t come close to paying the bills, and accepting that reality will put you in a much better position to salvage your retirement now.

So how do you feel about the fact that you shouldn’t rely on Social Security alone in retirement? Let us know in the comments!

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8 Reasons To Never Borrow From Your 401(k)

Don’t use your retirement savings account as a piggy bank.

Did you know you can actually take out a loan from your 401(k) retirement plan if you want to? According to recent data, about 20% of those participating in a 401(k) plan borrow money against that savings account. You might be tempted to do the same in order to pay for a large or unplanned expense, but there are many reasons why you should avoid doing so at all costs.

Below are the eight major reasons why borrowing from your 401(k) is a bad move for your long-term financial future.

By Lisa Smith

Reason #1: You Are Not Saving

If you borrow money from your 401(k) plan, most plans have a provision that prohibits you from making additional contributions until the loan balance is repaid. Even if your plan doesn’t have this provision, it is unlikely that you can afford to make future contributions in addition to servicing the loan payment.

Because the whole point of having a 401(k) plan is to use it is as a way to save for the future, you are defeating the purpose of having this account if you use it before you retire.

Reason #2: You Are Losing Money

If you not are not making contributions, not only is the entire balance that you borrowed missing out on any potential growth in the stock or bond markets, but each future contribution that you are unable to make (since you have an outstanding loan) isn’t growing either.

The extraordinarily low interest rate that you are paying to yourself with your loan payment is likely to be a pittance in terms of return on investment when compared to the market appreciation that you are missing.

“It is common to assume that a 401(k) loan is effectively cost-free since the interest is paid back into the participant’s own 401(k) account. However, there is an ‘opportunity’ cost, equal to the lost growth on the borrowed funds. If a 401(k) account has a total return of 8% for a year in which funds have been borrowed, the cost on that loan is effectively 8%. This is an expensive loan,” says James B. Twining, CFP®, CEO and founder of Financial Plan, Inc., in Bellingham, Wash.

Of course, there’s also the fact that you are paying yourself back with after-tax money. If you are in the 25% tax bracket, earning $1 only gives you $0.75 toward repaying the loan, and that $0.75 will be taxed again when you retire and withdraw it from your plan. While the interest rate on the loan may be low, you are getting taken to the cleaners by its tax implications.

Reason #3: Time Will Work Against You

Long-term investing (such as saving for retirement) is based on the idea that by putting time to work on your behalf, your money will grow. Most calculations suggest that your money will double, on average, every eight years.

401(k) plans permit each loan to be held for up to five years or longer. Therefore, if the loan is used to fund a first-time home purchase, loan holders not only lose out on what should have been an opportunity to nearly double their money, but they are also left unable to make up for the lost contribution and growth opportunities.

Over time, their balance is unlikely to ever reach the total that it would have reached had contributions continued uninterrupted. (For more insight, check out Delay in Retirement Savings Costs More in the Long Run, Understanding the Time Value of Money and Is it easier to save for retirement if you start early in life?.)

Reason #4: If Your Financial Situation Deteriorates, You Could Lose Even More Money

Should you find yourself in a position where you are unable to repay the loan, it is treated as a withdrawal and the outstanding loan balance will be subject to current income taxes in addition to a 10% early withdrawal penalty if you are under age 59½. (For more on this, read Tough Times … Should You Dip into Your Qualified Plan?.)

However, there are several exceptions to the early withdrawal penalty, such as the post-55 exception. (For more on this, check out the IRS page on this topic.)

Reason #5: You Are Trapped

If you have an outstanding loan, most plans require that the loan be immediately repaid if you quit your job. “If you cannot repay the loan 60 days after losing your job, it will become fully taxable and may be subject to a 10% early withdrawal penalty,” says Carlos Dias Jr., wealth manager, Excel Tax & Wealth Group, Lake Mary, Fla.

That means as long as you have a loan you are stuck in your current job and may be forced to pass up a better opportunity should one come along. Or, you can take the loan balance as a withdrawal and pay the 10% penalty, which further compounds the growth opportunities that you have missed by taking the loan.

Reason #6: You Lose Your Cushion

Taking a loan from your 401(k) plan should only be done in the most dire circumstances after you have completely exhausted all other potential sources of funding. If you take money from your plan to fund a vacation or pay off higher interest loans, the money won’t be there to borrow if and when you really need it.

Reason #7: It Suggests That You Are Living Beyond Your Means

The need to borrow from your savings is a red flag – a warning that you are living beyond your means. When you can’t find a way to fund your lifestyle other than by taking money from your future, it’s time for a serious re-evaluation of your spending habits.

What purchase could possibly be so important that you are willing to put your future in jeopardy and go into debt in order to get it? (For more insight, see Digging Out of Personal Debt and The Beauty of Budgeting.)

Reason #8: It Violates The Golden Rule of Personal Finance

“Pay yourself first” is the golden rule of personal finance. Violating that rule is never a good idea.

The Bottom Line
If the idea of taking a loan from your 401(k) plan crosses your mind, stop and think before you act. Instead of short-changing your future to finance your lifestyle today, consider re-evaluating your current lifestyle instead.

Scaling back on your expenses will not only reduce the burden on your wallet, it will also increase the odds that a sound retirement nest egg will be waiting for you in the future. “I have never met anyone who told me that they wished they had saved less,” says Chris Chen, CFP®, wealth strategist, Insight Wealth Strategists LLC, Waltham, Mass. “People think that they will make up a withdrawal later, but it pretty much never happens.”

Read the full article here.