We all have certain assumptions on what retirement will look like. Frequently, our expectations are influenced by others and the stuff we see and hear. For the most part, this is considered the time in life to slow down and enjoy it.
The problem is not everyone is properly prepared. Rather than addressing their shortcomings, some of these people tend to make excuses or justify whatever they want to believe.
Someone behind on their savings might tell themselves there’s always time to catch up. This also happens to be the most common of the retirement misconceptions. Understanding these fallacies can help you better prepare to make the most of your future.
1. There's Always Time to Catch Up on Retirement Savings
Regardless of how much we earn, there never seems to be quite enough money for everything. Life’s full of pressing financial demands such as keeping a roof over our heads, food on the table and maintaining some form of transportation. Raising a family further strains the budget.
As a result, almost half of all Americans have little or nothing set aside by the time they’re contemplating retirement. At that point, it becomes difficult, and even painful, to catch up.
It’s a darn shame we weren’t taught financial literacy back in school! For example, the power of compound growth and how over time investments increase in value. According to Vanguard, every dollar invested in your early 20s, could increase four times in value by age 55.
An old rule of thumb has been to “pay yourself first” and save 10% of earnings. With many employers offering matching 401 contributions, this should be a no brainer. One might say this is free money, yet, anywhere from 20-25% of employees opt out!
While it’s true saving for retirement early on is better, it’s also never too late to start. There are several options available such as catch-up contributions for those over a certain age. Generally, there’s more disposable income at this stage in life which can accelerate saving.
The drawbacks are it requires more aggressive saving and investment strategies. These in turn, could create unnecessary stress and extend your working years.
2. Investing is Risky and Not Worth It
Closely related to saving money is the need to invest it wisely. This becomes a major stumbling block, especially for anyone without a financial background or experience. In fact, it can be overwhelming with the many options, lack of knowledge, and so much conflicting advice.
Moreover, we’re talking about people’s life savings and the age-old dilemma of risk versus return. Someone with a low risk tolerance will likely lean towards “safe” investments such as bonds. Over the past ten years, the average return on bonds was 2.12%; whereas inflation averaged 2.65%. Thus, this risk adverse position would certainly not be worth it.
The stock market historically has delivered much higher returns, averaging 10%. However, it can be a roller coaster. The Great Recession (2008 Financial Crisis) is a case in point. According to Macrotrends, the Dow Jones plummeted almost 33% in 2008.
After almost three long years, it recovered highlighting the risk, especially for anyone who sold. Fortunately, things bounced back with over 26% growth in 2013! In spite of an average 10% growth, the market is volatile with continual fluctuations.
Further muddying the waters are the financial institutions with their products and services. And, make no mistake, they’re “for profit”. Thus, it’s not unbiased advice and they may be incented to recommend mutual funds which not be in your best interest. I learned the hard way by trusting a financial adviser for years.
For instance, one with less than stellar performance and riddled with high management fees. In addition, many companies partner with these institutions to provide employer matching 401K programs.
There are numerous reasons people might believe investing is risky and not worth it. According to the Motley Fool, an estimated 42% of Americans have no investments whatsoever in stocks. Instead, they might choose to pay off their home or other debt.
3. Live Off the Equity of Your Home
A home is generally our greatest asset. For years we made all those mortgage payments and, in most situations, property values have significantly increased. Arguably, this might be the best investment ever.
This is another of those retirement misconceptions as seldom will it be feasible to live off the equity of your home. The value of the property will determine how much money might be available as future income. This equity can be unlocked either by selling the property or doing a reverse mortgage.
Sell The House
Rather than complicate things, let’s take a simplified approach. The house is worth $400K with an annual desired income of $50K. After eight years, all the equity would be depleted.
Now, this doesn’t factor in real estate or legal fees, moving costs or interest earned.
Reverse Mortgage
An alternative approach is a reverse mortgage. This allows a couple to remain in their home while unlocking that hard-earned home equity. While it sounds like a great idea, there are several things to be aware of including:
A reverse mortgage can be an excellent way to supplement income for anyone wishing to remain in their home. However, the loan is limited to about half of the equity. Using our previous example, this might be $200K. With all the associated costs of home ownership, this likely means additional retirement income will be necessary.
4. Retirement Communities Are Less Expensive
As wonderful as retirement communities sound, they may not necessarily reduce your overall cost of living. Certain ones are great value and might actually reduce your expenses. However, the majority are more akin to resorts packed full of amenities, activities, and with access to nearby golf courses.
From my perspective, the greatest advantage of retirement communities is the lifestyle. We all know we need to keep active and socially engaged, which often becomes more difficult as we age. Our article, benefits of living in a retirement community, expands upon the reasons they’re so popular.
Each retirement community is unique offering differing levels of service and amenities. Some factors to consider include:
Ultimately, the decision to move into a retirement community is personal decision as they aren’t for everyone. Our article, disadvantages of retirement communities, sheds light on some of the drawbacks.
5. Social Security Will Be Enough
Many Americans believe they’ll be able to live off their Social Security benefits. As a sole source of income, these individuals would subside near the poverty level. Without savings or some form of additional income, their standard of living would diminish.
Social Security was never intended to be the sole source of income, rather a supplement. The earliest age of eligibility is 62 with an estimated 30% of Americans claiming this benefit. If they were to defer this benefit, the monthly amount increases by 8% for each year it’s delayed.
Considering the benefit will be paid to you for the remainder of your life, it becomes a personal decision when is the best time to take it. However, it should be noted the future of Social Security is open for debate unless changes are made. According to the Social Security website, trust fund reserves are projected to become exhausted by 2037. Once these reserves are used up, taxes are expected to be enough to pay 76% of benefits.
6. Will Be Able to Work as Long as You Want
Traditionally, the mandatory retirement age was 65. Everything’s changed and today some individuals plan on never retiring and continue to work into their 70s and 80s. Inversely, we also observe a growing trend of people retiring earlier, either by choice or through circumstances.
In a perfect world we should all be able to work as long as we want. This statement, unfortunately, is a misconception as there are many things beyond our control. In spite of our best laid plans, sometimes everything goes sideways. Some examples include:
Just like we’ve had to do throughout life, we need to remain flexible and adapt. With job loss, this might mean finding a new employer, switching careers, or exploring completely new job opportunities.
Our article, reasons you should never retire, expands upon the reasons why some individuals never plan on retiring. Closely related is our article on how to bulletproof your career to avoid forced retirement
7. Expenses Will Go Down in Retirement
Almost everyone expects their expenses will go down after they retire. This seems reasonable after considering how much is spent on the daily commute, parking, fuel, repairs and maintenance, lunches, clothes, and all those other work-related expenses.
Possibly the vehicle is no longer needed (especially in a two-car household) which can be sold further reducing costs. Another cost savings might be lower taxes as retirement income is generally less than when receiving a paycheck.
So why is it a fallacy to expect cost of living to go down in retirement?
The reality is retirees have a great deal more free time. Now they can do all those things they always wanted. This might involve travelling to new destinations or visiting family/friends. Depending upon their interests, they’ll likely pursue hobbies and activities. All this costs money.
It should come as no surprise that everything keeps going up in price. Even the basics such as groceries, gas, utilities, property taxes, insurance, and so on. Dining out or going to a show seems exorbitant. And, inflation will continue to erode quality of life for anyone on a fixed income.
Another biggie is healthcare. With employer benefits gone, private healthcare insurance will surely dent any budget. Besides the fact these costs will increase year over year, the rates also increase as we age.
8. Medicare Will Cover All My Needs
Another of the retirement misconceptions is Medicare will cover all my needs. Medicare is the federal government healthcare plan available to those 65 and older. Original Medicare (Part A & B) is basic coverage and doesn’t cover all medical costs.
There can be deductibles and copays incurred. In addition, Original Medicare doesn’t cover vision, dental, hearing, or prescription drugs. More comprehensive insurance can be purchased with an Advantage plan or supplemental policies.
Even with additional coverage, significant out-of-pocket costs may be incurred. According to Fidelity, “an average retired couple age 65 in 2023 may need approximately $315,000 saved”.
In addition, long-term care, such as a nursing home, is not covered and will be expensive.
9. Won't Need Long-Term Care
One of our greatest unspoken fears is growing old and infirm. Besides being downright depressing, we, somehow, hope this won’t be our fate.
According to A Place for Mom, “70% of adults aged 65 and older will require long-term care at some point.”
On a more cheerful note, in-home daily living assistance is also a form of long-term care. This promotes independent living and staying in your home. This is when a caregiver comes in to assist with bathing, meal preparation, and other household duties.
Alternatively, assisted living accommodation may be appropriate when additional care or monitoring is required. While more expensive, it’s still far cheaper than a nursing home.
As much as no one wants to think about it, this stage of life is a stark reality.
10. You Can Rely On Your Children
In the past, there was an expectation children would help out their parents in old age. Life expectancy was shorter and families larger. That was also before the wide-spread acceptance of long-term care facilities.
Anyone counting on their kids to take care of them in today’s age might be in for a rude awakening!
First of all, times have changed and it’s not realistic to expect a son or daughter to look after mom or dad. They have their own busy lives and may not be in a position to provide much in the way of assistance. This is especially so if they reside far away.
A second point is they may not be able to deal with the financial burden. They may still be paying off a student loan, have mortgage/car payments, and raising a family. Not to mention they should be saving for their own retirement!
Instead of your children rising to the occasion and fulfilling your expectations, you might find yourself in some state-run facility.
11. Friends Will Always Be Around
We want to believe our friends will always be around.
Most of us can count our close friends on one hand with, perhaps, a dozen or so casual friends. Almost inevitably, some will drift away over the passage of time. Many factors can corrode friendships such as self-interest, resentment, jealousy, and so on.
Even someone you considered a close friend may become more distant and wind up as an acquaintance you occasionally keep in touch with.
Retirement is a life changing event and tends to diminish our circle of friends. Work friends, in particular, seem to fade away the day you leave work. In spite of all the years of working together, it would appear work was the common bond. Our article, how to cope with the loss of work friends after retirement, covers this issue in more depth.
There’s a myriad of ways friendships can come to an end. One of you might move and gradually lose touch with the other. Alternatively, a disagreement or unforgivable act can shred the relationship. Even worse is when a close friend passes.
Maintaining positive relationships and expanding our social connections are critical to well-being. Our article, surefire ways to make friends, provides insights into how to do this.
12. Counting on An Inheritance
Many baby boomers stand to receive an inheritance; however, counting upon it is another one of those retirement misconceptions. Even with a documented will, things can change and there are no guarantees. Some factors to be aware of include:
Hence, an inheritance should be viewed as a windfall and not a primary retirement strategy.
Closing Thoughts on Retirement Misconceptions
The reason these misconceptions about retirement are so common is people want to believe them. For instance, someone behind on their savings wants to believe there’ll be time to catch up. They might justify it thinking they can always work a few more years.
Seldom does everything go according to plan. That’s when these assumptions can have dire consequences. By dispelling them and taking proactive steps, individuals can better prepare for a secure and comfortable retirement.
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