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Entering retirement — whether you are 40, 50, 60 or 65 — marks a new chapter in your financial, professional and personal life, but like some retirees, you may find the reality doesn't quite align with your vision. Don't let the following five common retirement myths affect the ways you save, invest and otherwise prepare for your golden years.
Myth 1: Your Expenses Will Suddenly Decrease
How much money will you need to retire comfortably? That answer depends on a number of factors, perhaps most importantly the lifestyle you expect to enjoy during retirement and how much you are able to save to achieve that goal. Nasdaq has reported that Americans estimate they will need $1.1 million to retire comfortably, but less than 25% will actually have sufficient retirement savings to do so.
Removing your commuting, work wardrobe and business-related travel and dining costs could reduce some of the expenses to which you've grown accustomed, but your retirement expenses ultimately depend on the lifestyle you pursue once you stop working, as well as your saving and spending habits.
Long before you plan to retire, track the amount of money you spend each month (and on what) to establish a sense of your average expenses. Given that some of those expenses will likely go away once you retire — like fuel costs related to your commute — your overall living costs could go down in retirement. But if you plan to exchange the work commute for world travel or buy a home on the beach once you've sold your current one, it's less likely that retirement will leave more money in your pocket.
In addition, take note of outstanding debt like high-interest credit card balances or car loans. If you plan to pay them off while you're still earning income, those expenses will be eliminated (along with the interest and fees that may come with them) and ultimately won't affect your retirement spending.
Myth 2: No More Tax Concerns
You may no longer rely as much on your employer's W-2 when filing your annual tax return in retirement, but that doesn't mean taxes stop being part of your life. Once you turn 70 1/2 or 72 (depending on your birthday, according to IRS requirements), for example, you may be required to take annual minimum distributions from your retirement accounts — which are then included on your income tax return. Social Security and other retirement benefits are also generally subject to income tax.
You may also find that you're eligible for some tax advantages in retirement, such as the tax law that allows taxpayers age 70 1/2 and older to make contributions directly from their individual retirement accounts (IRAs) to qualifying charities and count those qualified charitable donations toward their required minimum distributions. Some retirees may find that they're eligible for tax advantages they weren't eligible for previously, like the ability to deduct unreimbursed medical expenses that exceed a percentage of their adjusted gross income (AGI). Per IRS guidelines, you can deduct only the part of your medical and dental expenses that is more than 7.5% of your adjusted gross income (AGI).
Myth 3: Every Day Will Be Like a Vacation
Whether you dream of not waking up to an alarm each morning (like you have over the last several decades) or are simply looking forward to a day without professional commitments, common retirement misconceptions swirl around the myth that endless free time equates to joy or contentment. Retirees often find that a sense of purpose is more important than non-stop relaxation. In fact, your health could benefit: A study published in the American Journal of Health Promotion showed growing evidence indicating that “a higher sense of purpose in life is associated with reduced risk of chronic diseases and mortality.” So to promote your own strength and vitality, you might consider seeking opportunities to volunteer with local organizations or mentor younger students and professionals.
Myth 4: You'll Never Work Again
The pandemic has changed a lot in our lives — including retirement. During the pandemic, millions of older Americans retired before they reached 65. Now, however, approximately 1.5 million of those retirees have gone back to work, according to information from the U.S. Bureau of Labor Statistics. Entrepreneur.com offers five unexpected reasons why these retirees are returning to the workforce: an evolving work environment (offering more flexibility to employees), an opportunity for retirees to put their skills and experience to good use, a way to remain active and reduce the risk of health problems, a place for social interaction and personal loyalty to a company or government agency after a long career of working there.
Regardless of the reasons why retirees decide to reactivate their working lives, this movement seems to debunk retirement myths about older adults wanting to spend their golden years in a rocking chair or on a golf course. Though the emerging trend of "unretirement" doesn't mean you have to stay in the same profession in which you spent most of your working life, it does demonstrate that retirement doesn't have to mean the end of your professional life — rather, it may simply be the start of a new chapter.
Myth 5: Social Security & Medicare Have You Covered
Whether you can live off of Social Security and Medicare in retirement depends on many factors, including the age at which you claim benefits, your current and future medical needs, and the possible future depletion of the Social Security trust. However, it's important to know the role each will potentially play in your retirement finances in order to build the rest of your retirement savings strategy accordingly.
AARP reports that the average Social Security recipient now gets $1,668 per month (as of May 2022); the maximum payout for those who wait to claim benefits until full retirement age is now $3,345 per month ($40,140 per year). While Medicare Part A coverage can offset the costs of your hospital care in retirement, retirees should still be prepared to fund additional premiums for Medicare Part B, prescription drug costs and other healthcare expenses they may face related to vision, dental and hearing aid coverage.
Retirement misconceptions can make it challenging to know what your future will hold, but a little strategy and planning can help you prepare. Don't let retirement myths prevent you from working towards the personal, financial or professional future you want.
Speak With Western & Southern Today to Identify the Best Retirement Planning Strategies for You
Determining which retirement planning strategies are right for you and your spouse or partner can be a daunting process. Fortunately, Western & Southern’s retirement planning experts are on hand to partner with you to help create the retirement future you envision.