When it comes to retirement planning, the last thing you can afford to do is listen to bad advice. The choices you make now can have a significant impact on your financial future, even if you’ve still got decades before you leave the 9-to-5 behind.
Buying into misconceptions about what you should and shouldn’t be doing to build your nest egg can potentially shrink your savings, so make sure you’re avoiding these retirement myths:
Retirement planning myth #1: Delayed savings is OK
When you’re trying to launch your career and juggling credit cards or student loan debt, finding extra money to put toward retirement may seem impossible. Telling yourself that you’ll get started with saving once you get a raise or land your dream job sounds harmless enough but it’s really an excuse that comes with a high price tag.
The longer you put off saving, the more money you’re costing yourself in the long run in the form of unrealized gains as part of your retirement planning.
Let’s say you contribute $5,000 a year to your retirement fund starting at age 25. Assuming an annual rate of return of 6%, your account will be worth nearly $775,000 by age 65. Now, assume you wait until you’re 45 to start saving that same amount. Using the same rate of return, you’d only have about $183,000 saved once you turn 65.
When you run the numbers, it becomes immediately apparent how much you stand to shortchange yourself by delaying your savings in retirement planning. Even if you can only afford to start chipping in $50 or $100 a month it’s much better than trying to play catch-up later on.
Myth #2: Contribute enough to get company match
If you’re enrolled in a 401(k) or a similar plan that offers matching contributions, thinking you only need to put in enough to qualify for the match is a mistake in retirement planning.
Typically, employers offer to match every dollar you save up to a certain amount of your compensation, which usually ranges from 3-6%. While you should definitely be putting in at least the minimum to get the most free money possible, you shouldn’t assume it’ll be enough to meet your retirement needs.
For 2014, you could max out your 401(k) to the tune of $17,500 or $23,000 if you’re over age 50. That’s something you should consider doing if you’ve got enough wiggle room to go ahead and up your elective deferrals in your retirement planning. Not only are you padding your savings even more, you’re reducing your taxable income which can definitely work in your favor once tax season hits.
Myth #3: 401(k) is only account you need
One of the errors people tend to make when it comes to retirement planning is thinking that their 401(k) is the end-all, be-all of saving but it’s really just the tip of the iceberg.
Supplementing your savings with an individual retirement account allows you to squirrel away even more cash while enjoying some additional tax breaks.
With a traditional IRA, the money you put in is usually tax-deductible based on your income and whether you’re covered by an employer’s plan.
A Roth IRA is funded with after-tax dollars and you don’t have to pay taxes on the money once you start making qualified withdrawals. The current contribution limit for either type of account is $5,500 plus an additional $1,000 if you’re over 50. That adds up to some serious savings if you’re already maxing out your employer’s plan.
Myth #4: Save less because costs lower
The standard rule has been that you should be saving 15% of your income for retirement planning But in today’s economic climate, it doesn’t always apply.
Workers who are middle-aged or getting closer to retirement are increasingly finding themselves providing financial support for aging parents or adult children who are battling one of the toughest job markets in history. Not only that, but they’re living longer which means their savings need to be able to stretch even more.
Assuming that your expenses will be lower in retirement because your house will be paid off or you plan to scale back your lifestyle is a fallacy. An unexpected illness or the loss of your spouse if you’re married can be a major blow financially.
Looking at the bigger picture to decide how much you’ll realistically need to live on and what you need to set aside as a safety net is a smart way to cover all the bases.
Myth #5: You can work longer if you need to
According to an April 2014 Gallup poll, the average age for retirement in the U.S. has climbed to 62. Nearly half of those surveyed said the average age at which they expect to retire is 66 and one in 10 said they would likely continue working indefinitely.
The poll found that overall, baby boomers are more reluctant to retire because they saw their savings take a massive hit in the wake of the recent recession.
While there’s nothing wrong with working past retirement age if you need to or if you just enjoy getting out of the house, it shouldn’t be the cornerstone of your financial strategy for retirement planning.
If you end up developing a serious illness or you suddenly become disabled, continuing to work may cease to be a possibility. Even if you have disability insurance or you qualify for Social Security, it may not be enough to cover the gap.
Everyone’s path for retirement planning looks different and unfortunately, there’s not a road map that spells out where the right and wrong turns are. If you’ve taken a few detours along the way and bought into any of these myths, it’s not too late to turn things around.
The more knowledgeable you are about your financial situation and what your retirement needs are, the easier it is to find the most direct route to your goals when doing retirement planning.