6 Myths That Can Ruin Your IRA or 401(k), and Your RetirementJennifer Anderson
When it comes to retirement planning, everyone has advice. How much do you need to save? What expenses do you need to cover? How long will it need to last? Unfortunately, a lot of the information going around is misinformed, misguided or just plain wrong, and listening to it can be detrimental to your future. Here are six of the most popular myths that can ruin your IRA or 401(k), along with the security of your retirement years.
Myth #1: All You Need Is Social Security
A lot of people assume that, when they retire, their monthly Social Security checks will be enough to cover all of their expenses. Therefore, they don’t even bother building up an IRA or 401(k) on their own. There are several problems with this. First of all, if something should happen that forces you to leave work before you turn 66 (for instance, if company cutbacks cause you to be laid off at 62, and you’re unable to find another job), your monthly government check will be reduced.
But even if you do retire at the proper age, the money you receive likely won’t be enough to live on. These days, Social Security’s real role is as a supplement to your regular retirement savings, rather than as a sole source of income. If you don’t have an IRA or 401(k) to shoulder the burden of your regular living expenses, you’ll find yourself struggling just to get by.
Myth #2: Taxes Are Lower for Retirees
One good thing about retirement; since you’re no longer working, you don’t have to worry about taxes, right? Wrong. Even though your income is lower, the money coming in from your IRA is still taxable, just like your regular salary was. Many people don’t take this into account when building their 401(k), and their IRS tab ends up taking a large chunk out of their savings.
Myth #3: Your Savings Only Have to Last a Decade or Two
How long will your retirement savings need to last? Of course, no one knows when they’re going to die, but by looking at health history, family history, and other factors, experts can give you a rough estimate. That way, you have at least some idea of how long to plan for once you leave work.
However, many of these figures fall far short of the actual numbers. The Society of Actuaries has found that people are living an average of 11-13 years longer than their estimated life expectancy. If you don’t take this possibility into account when planning for your retirement, your savings will depleted when you still have a decade or more to live. When building your IRA or 401(k), err on the side of caution and make sure you save enough to support yourself—and then some.
Myth #4: You’ll Work Until You Die
Many hearty souls believe they’d be too bored in retirement, and would happily stay working, and earning, in some capacity right up to the end. Unfortunately, that decision isn’t always up to us. Unless you own the company, as an older worker you face the same layoff risk as any other employee, perhaps even greater if your employer can get someone younger to do your job for less.
You also run the risk of being sidelined by an injury or illness that makes it impossible for you to keep working. According to a MetLife Mature Market Institute study, more than half the baby boomers who’ve hit retirement age found themselves exiting the workforce before they’d planned to. Realizing you’ve just seen your last paycheck is not something you want to face unprepared.
Myth #5: Your Savings Only Need to Support You
When most people think of saving for retirement, they figure how much money they’ll need to live on as an individual. But what about your family? Do you have a spouse or children living with you? Even if they have their own incomes, the sudden reduction of yours could still put a serious strain on all of you. Make sure you have enough in your 401(k) so that your entire household can live comfortably.
Myth #6: Bonds Are the Best Investment for an IRA or 401(k)
The stock market is too risky to trust with your future. Even in sound economic times, a couple of bad decisions can send your portfolio plummeting. And with things as financially volatile as they are now, it’s unlikely you’ll even end up breaking even, much less turning a profit on your investments.
Some people therefore assume that the best place to put their retirement money is in bonds. The risk is much lower than for stocks. Unfortunately, the yield is much lower too—and has become even more so in recent years. Bond values are depreciating, and as inflation rises, you’re likely to end up losing money as they mature, rather than making it.
These are just a few of the retirement myths there are out there. Believing them can be devastating to your savings. However, if you make a plan to avoid these pitfalls, and put your money into a safe haven that will maintain its value over time, you can secure your future and ensure your prosperity once you leave the workforce, to live the rest of your life in the comfort and peace you’ve earned.