Many Americans do not adequately save for retirement because of lack of information about its true cost. For instance, they might think they will spend less in retirement. But the Bureau of Labor Statistics found that “older households,” defined as head of household age 65 and older, spend approximately $46,000 annually in retirement (this includes housing, transportation, healthcare, food, personal insurance/pensions, cash contributions, and entertainment). And while some costs will go down, others will go up, such as healthcare.
Yes, retirement costs vary depending on where you choose to live, when you retire, and more, but you still need to save diligently. Assume you will be spending about 80 percent of the annual income you’re making now every year in retirement.
In today’s blog post, we’ll be exploring six common myths that could derail your retirement security:
1. “I’ll spend less when I retire.”
You paid off your mortgage and no longer have to worry about commuting costs — but that doesn’t mean you’ll be spending less in retirement. For many retirees, they spend the same amount or more during these years. They find that this money is now going toward medical expenses, vacations, home improvements, presents for children and grandchildren, and more. Also, retirees should keep in mind that inflation will affect their expenses.
2. “I will pay fewer taxes when I retire.”
In retirement, you might end up being pushed into a higher tax bracket. You might qualify for fewer deductions and exemptions than in previous years, and your state and local taxes could increase. Also, remember that pensions, IRA withdrawals, and 401(k) withdrawals will all be taxed as income.
3. “Downsizing is easy.”
A report from Merrill Lynch found that more than half of pre-retirees don’t end up downsizing with their final move, and that 3 in 10 actually buy a larger home. Also, retirees often end up selling their older homes for newer, more modern apartments, and these units can be expensive.
4. “My children will not need my financial help.”
Your children may still ask for financial support in their adult years — and it can be hard to cut them off because of the emotions and relationships involved. For money conversations with your children, it can be helpful to have a financial advisor involved as an objective third party.
5. “I can delay saving for retirement until later when it’s easier.”
People are living longer in retirement, and so you need a bigger nest egg than previous generations. Don’t delay saving for retirement; otherwise, you’re missing out on the power of compounding returns. The sooner you begin saving, the less you will need to save each month to reach your financial goals.
6. “My spouse will take care of my retirement.”
With the rise of gray divorces (divorces later in life), many people are finding that they have to be financially independent during their retirement years. And with longer life expectancies, people may outlive their spouses and need more savings in retirement.
It’s important to start saving for retirement early. You can begin the process by reading our whitepaper on retirement planning and reaching out to the Harris Financial Advisors team today.