You’re already picturing your dream retirement. It’s filled with travel, hobbies, family time or new adventures. Whatever your vision looks like, we’re betting money troubles aren’t part of the equation.
So it’s important now — while you’re still saving for retirement — to give your mindset a check-up and make sure you’re on track. To do that, we’re highlighting six myths about saving for retirement and setting the record straight.
MYTH 1: ‘I WON’T GET SOCIAL SECURITY.’
A recent Gallup poll found that 72 percent of Americans worry a great deal or fair amount about the Social Security System. Social Security is often the bedrock of retirement planning, as it provides consistent monthly income for as long as you live. While the Social Security Administration projects that the trust fund for retirement benefits will be depleted by 2034, it believes it will be able to pay roughly three-quarters of benefits through at least 2092, and that’s if lawmakers do nothing to change the system.
While Social Security is likely to continue to provide a base of income for some time, it’s not likely to cover all the income you’ll want in retirement. In fact, the Social Security Administration reports that the average benefit replaces only about 40 percent of your pre-retirement earnings.
That’s why it’s important to make sure you’re planning for supplemental income in retirement. 401(k)s or IRAs are a great, tax-advantaged way to start saving. But as you plan for your retirement, it’s important to consider how saving into various accounts can help you make money go further in retirement.
MYTH 2: ‘I HAVE DEBT, SO I CAN’T SAVE FOR RETIREMENT.’
Debt is a reality for a lot of us. It may feel good to funnel as much money as possible at eliminating debt, but it may not be the best option. That’s because you miss out on the power of compound interest. The average stock market return, adjusted for inflation over the past 60 years, is 7 percent. If you’re paying a lower interest rate on your federal student loans or mortgage, overpaying those loans may actually cost you money that you could have made by investing it.
In addition, some companies have started helping employees pay debt while also saving for retirement. Your company may offer you incentives to save for retirement while paying off student loans.
Thanks to compound interest, the sooner you start to save, the less you actually may have to contribute.
MYTH 3: ‘I’M TOO YOUNG TO START SAVING FOR RETIREMENT.’
When retirement is decades away, it may feel like a priority you don’t have to worry about for a while. But, thanks to compound interest, the sooner you start to save, the less you actually may have to contribute.
Here’s a great example of what we mean. Kristi and Tyler are both planning to save for retirement. Kristi decides to start saving early and contributes $500 to her retirement account each month beginning when she is 20. She makes contributions for 10 years and then stops. When she retires at age 65, she will only have contributed $60,000 to her retirement, but with compound interest and a 7 percent annual return over a long time, she will have more than $885,000. Tyler decides to wait until he’s 30 to start saving. He begins contributing $500 each month to his retirement accounts. He continues to make that level of contribution until he retires at age 65. At that point he will have contributed $210,000. With compound interest on a 7 percent annual return, he will have saved about $829,000. He has less money than Kristi, despite having contributed more than three times as much.
MYTH 4: ‘I’M TOO OLD TO START SAVING FOR RETIREMENT.’
While you may have missed an opportunity to save in your younger years, there’s still plenty you can do to maximize your return later in life. Try these tips to supersize your savings:
- Take full advantage of the catch-up contributions permitted by the IRS.
- Nab every cent of your company’s 401(k) plan matching contributions.
- Open an IRA or Roth IRA account to contribute even more.
MYTH 5: ‘IF I SAVE A MILLION DOLLARS IN MY 401(K), I’LL HAVE A MILLION DOLLARS IN RETIREMENT.’
It’s natural to see how you would think that. Unfortunately, the money you put into a traditional 401(k) hasn’t ever been taxed. Come retirement, that will change. You will owe ordinary income tax on the money in your 401(k) as you withdraw it. That means if your effective tax rate is 15 percent and you withdraw $75,000 you will only get $63,750 after you pay your taxes. The same is true if you’re saving into a traditional IRA.
On the flipside, if you save into a Roth IRA or Roth 401(k), you will pay tax as the money goes in, and you won’t ever owe any more later. Having a mix of traditional and Roth accounts can help you be more tax-efficient when you get to retirement.
MYTH 6: ‘MY LIFE INSURANCE HAS NOTHING TO DO WITH MY RETIREMENT.’
If you own a whole life insurance policy, it can be a great way to supplement your retirement income. That’s because whole life insurance cash value is guaranteed to grow and won’t decline in value — even when the markets decline. In fact, when you have whole life insurance as part of your retirement income plan, you may be able to take additional risk with your investments because you can use your life insurance cash value to ride out down markets.
In addition, some whole life insurance policies allow you to use a portion of your death benefit to pay for long-term care expenses.
A financial advisor can help you put together a retirement savings plan that will position you well for when you get to retirement and have to start living on your savings. Often, the plan will include multiple pieces that will allow you to be efficient with your money so that you make what you have saved go further.