10 Retirement Myths That Can Wreak Havoc on Your Nest Egg
When you think about your retirement, what picture pops into your head?
Is it a vision of you relaxing on a catamaran in the middle of the Pacific? Or do you see yourself hunched over a computer, working a nine-to-five gig because you can’t afford to quit for good?
It’s no secret that we are facing a retirement crisis. The National Institute on Retirement Security estimates that Americans are at least $6.8 trillion short of what we need to fund comfortable retirements. Baby boomers, who are retiring at the rate of 10,000 a day, find themselves particularly unprepared, with a median of $120,000 saved—not nearly enough to sustain a 30-plus year retirement.
Part of the reason why we probably find ourselves so unprepared is because there are so many mistaken beliefs floating around about the “R” word. From the naive (“I’ll be able to live on less!”) to the glum (“I’ll never save enough!”), there’s no shortage of misconceptions that could impact how you prepare for the future.
But with so much at stake, we’re here to help set you straight. Below, we expose the common myths that could be throwing you off your own retirement course.
Myth #1: I won’t need as much money when I retire.
Ask yourself: When do you tend to spend the most money? Is it when you’re at work or when you have a leisurely day off? Now consider that your retirement will be more like your Sunday than your Monday.
“We tend to spend more when we have free time,” says Scott Hanson, CFP®, of Hanson McClain in Folsom, Calif. “People often spend more in retirement than they do working, particularly in the first few years.”
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A rule of thumb oft quoted is that retirees will need about 70% to 80% of their pre-retirement income to maintain their standard of living. But what you save in housing costs if you’ve paid off your mortgage, for example, can easily be wiped out by increased spending on “bucket list” activities, like travel and hobbies.
How much you should plan to spend—and save—depends on how you currently manage your budget. And that may mean assuming your expenses won’t go down at all. “If you are saving 30% of your income today, then living off 70% in retirement may make perfect sense for you,” says Ellen Derrick, CFP®. But if you tend to spend most of what you bring home, or you don’t expect to own your home by the time you retire, you may need up to 100% of your pre-retirement income to maintain your standard of living.
And don’t forget that you may not be able to rely on Social Security the way that today’s retirees do. The program will require an overhaul to keep its coffers filled for the future. In fact, if you’re 10 years or more from retiring, it may be better to not even figure Social Security into your retirement planning.