Although retirement planning often involves some guesswork regarding the future of the economy as well as each retiree’s individual circumstances, there are some general misconceptions to avoid in order to be sure you’re building a solid nest egg. We go through these common beliefs below so you are informed when setting goals for retirement.
The 4% Rule is Steadfast
The 4% rule has been regarded as a sound retirement distribution strategy for years. With this method, retirees withdraw 4% from their retirement portfolio during the first year of retirement. The amount then increases each year according to inflation. This method, in theory, should yield a consistent stream of income for at least a 30-year retirement. However, given market expectations—namely, lower projected returns for stocks and bonds—the general consensus is that the 4% rule be amended to 3.3%. This may seem like a small difference, but it could have a big impact on your standard of living. The difference would be even more evident later in retirement, when accounting for inflation.
You Can Live Off Social Security Benefits
Social Security will only replace about 40% of preretirement income. Given that retirees need to replace approximately 80% of preretirement earnings to prevent a significant reduction in quality of life, Social Security Benefits will fall way short of this mark. Make sure your game plan includes additional savings from investment accounts to cover the discrepancy.
You Can Start Withdrawing Social Security at 65 Years Old
When the Social Security Act was signed into law in 1935, it established age 65 as the full standard benefit age. Couple this with the fact that 65 is also the Medicare eligibility age, and Americans have long considered 65 to be the standard retirement age. However, while Medicare eligibility age remains the same, full retirement age (FRA) has since changed. Depending on a retiree’s birth year, their FRA can be anywhere from age 66 and four months to age 67. This means that if you start Social Security at 65 (before your FRA), you will be subject to early filing penalties that could slash a substantial portion of your monthly check. Be sure to check your online Social Security account to be informed of your FRA and the appropriate timeline for claiming benefits.
Saving 10% of Income for Retirement is an Adequate Goal
For decades, workers followed the rule of thumb to save 10% of their salary for retirement. However, longer life spans, lower projected market returns, and the declining value in Social Security benefits have all contributed to the need to save more. It’s important to work with a financial advisor to come up with a personalized plan for retirement goals, but at the very minimum, aim to save 15% to 20% of income.
Medicare Will Provide Sufficient Coverage for Care
Medicare often doesn’t provide enough coverage for seniors ages 65 and older. Factors such as high insurance costs and coverage exclusions contribute to the need for supplemental coverage, such as Medigap. And sometimes seniors find that a Medicare Advantage policy—the private insurance alternative to traditional Medicare—is a better fit. No matter what you ultimately decide, it’s crucial to devote specific funds to medical costs, either in a health savings account or another tax-advantaged retirement account.
