Retirement planning requires a lot of guesswork about what will happen in the future. Ideally, however, the decisions you’re making will be informed by facts so you can make solid plans for building a sufficient nest egg.
Unfortunately, many future workers are actually buying into some common misconceptions that could lead them to set savings goals that fall short. You don’t want to be one of them. And you won’t be if you know the truth about these five commonly held beliefs about retirement that are actually wrong.
1. The 4% rule guarantees you won’t run out of money
For years, retirees have been told about the 4% rule when deciding how much to withdraw from retirement accounts. The 4% rule says seniors take 4% out of their retirement account during their first year after leaving the workforce. By sticking to this strategy and increasing withdrawals only to account for inflation, the theory was that their money would last for life.
Unfortunately, recent research from Morningstar found the 4% rule is no longer safe to follow based on future projected returns for stocks and bonds. Instead, updated data suggests it’s safe to withdraw just 3.3% in order to reduce the risk of your account running dry.
A lower withdrawal rate makes a huge difference in how much you must save for your future. If you planned on following the 4% rule, a $1 million nest egg would provide $40,000 in retirement income. But if you can only safely withdraw 3.3%, your $1 million in savings would produce just $33,000 — potentially leaving you with a $7,000 shortfall.
2. Social Security will fully support you
Another common misconception is that Social Security provides sufficient income to support you in your later years.
This is far off the mark, as retirees need to replace around 80% or more of preretirement earnings to avoid a major decrease in quality of life. Social Security is designed only to replace 40%, leaving you with about half the money you’d need if you don’t have savings to provide the rest.
Future retirees should check their mySocialSecurity account to see how much income their benefits will reasonably provide, as well as plan to ensure their investment accounts will produce the rest of the requisite funds while maintaining a safe withdrawal rate.
3. 65 is the standard retirement age
When Social Security was first created, retirees could get their full standard benefit at age 65. Seniors also become eligible for Medicare at 65. This has created the perception in many people’s minds that 65 is the “standard” retirement age.
The problem is, full retirement age (FRA) has changed, although the Medicare eligibility age remains the same. Retirees aren’t eligible for their standard Social Security benefit until at least 66 and four months and potentially as late as age 67, depending on their year of birth. If you plan to retire and start Social Security at 65, you’ll be hit with early filing penalties that substantially reduce your monthly check amount.
Every future retiree needs to know what their full retirement age is and how an early Social Security claim can end up cutting their benefits so they can make the right choices about when to get their first retirement check. Logging into your online Social Security account is a good way to figure that out.
4. It’s enough to save 10% of your income for retirement
Another rule of thumb many people traditionally followed relates to how much income should be saved. Workers were told to set aside 10% of their salary to be prepared for retirement. But a number of factors, including longer life spans, lower projected market returns, and the declining buying power of Social Security benefits, have affected the amount future retirees should put aside.
The sad reality is that saving just 10% of income could leave workers with a huge financial shortfall. Instead, workers should set personalized goals to see how much they should invest or otherwise aim to save a minimum of 15% to 20% of income if they’re not willing to take the time to do that.
5. Medicare will fully pay for your care
Finally, it’s common for current workers to have unrealistic perceptions of how much care Medicare covers.
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