Retirement changes your life drastically and hopefully for the better. Some people tend to think that retirement is all about money, but the truth of the matter is that retirement is a lifestyle, it is a choice of life and you choose a particular lifestyle for your golden years based on the decisions you make during the years of employment. However, as there are many retirement myths that are often misleading, many people tend to make the wrong decisions and therefore they are more likely to ruin their retirement, not only in terms of accumulated money, but mostly in terms of quality of life.
The following are the most common retirement planning myths.
Myth #1: It’s better to start saving for retirement at 40
Many people think that it’s better to start saving for retirement in their 40s, after they have bought their first house or sent their kids to college. The idea is that they feel safer to cover for these basic needs first and then start worrying about their retirement, which won’t happen sooner than the next 20 to 25 years.
However, the later you start saving for retirement, the most costly it can be for your retirement income. If you start saving in your 40s, you don’t allow your income to earn a lot of compound interest until retirement because the time horizon until maturity is significantly less than if you start saving in your 20s. In contrast, each dollar you save in your 20s earns more compound interest for a period of 40/45 years than it would earn for a period of 20/25 years. Moreover, you have to consider inflation and the increasing cost of life as years go by. Therefore, although retirement is not happening tomorrow, you have to start saving today to allow your retirement income to accumulate more compound interest and earn you a secure financial future.
Myth #2: Retiring early is the best option
Many people think that retiring early is the best option because it allows free time to enjoy hobbies, leisure and retirement income. Especially those workers who have been working more than 30 years, consider that retiring early can only be beneficial.
In spite of the great benefit of leading a stress-free life, retiring early is highly challenging as you are required to save more money for retirement in a shorted period of employment.
Retiring early has the following drawbacks:
* Retiring early allows less time to accumulate retirement income. This means that, while working, you will have to save more for your retirement.
* Considering that life expectancy for the U.S. population is constantly increasing, you will be required to cover more years after retirement with less income.
* Social security retirement benefits are not available until age 62. But even if you retire at 55 and you start collecting Social Security retirement benefits, they will be reduced.
* Medicare benefits are not available until age 65. This means that you will have to cover for your health insurance until you are eligible to receive Medicare coverage.
Myth #3: You cannot borrow against your 401k plan before retirement
The rule of thumb is that any money you withdraw out of your 401k plan before the 59 ½ is a financial hardship withdrawal and you have to pay a 10% early withdrawal penalty plus income tax on it. Also known as hardship loan, this amount is to cover an “immediate and heavy” financial need, lacking alternative financial options, and is deemed for
* The purchase of first property (first-time home buyers);
* To cover college tuition for a family member, provided the tuition is due within the next 12 months;
* To prevent foreclosure or bankruptcy;
* To pay un-reimbursed medical expenses
Myth #4: You need a lot of money in retirement
The more money you have in retirement, the merrier, but this doesn’t mean that you cannot be a happy retiree with a lower income. Financial advisers suggest that your retirement income should be 70%-80% of your pre-retirement income. However, even if you are not able to accumulate this amount of money, you can get extra help from Social Security retirement benefits and Medicare benefits (if you are eligible), consider a reverse mortgage to take a loan against your home value without any interest or principal repayments until you sell your house or adjust your credit card payments to pay on your credit twice a month and lower interest charges. There is no doubt that low income in retirement can be challenging, but if you follow effective money management tips, you can enjoy financial security in your golden years.
All in all, retirement is a myth for most people until they actually reach their peak years and decide to retire. However, retirement planning myths complicate things a bit more and add up to the complexity of the retirement decision. Therefore, the best you can do is focus on your retirement goal, take the advice of your financial advisor and accumulate as much money as possible to enjoy your golden years under the umbrella of financial security.