Now that you’re in your 40s or 50s, you’ve probably started to daydream about how awesome it will be when you and your spouse can retire. You have so many wonderful things on your bucket list: traveling to the black and white sand beaches of Tahiti, or perhaps heading north to Iceland to take in the spectacular Aurora Borealis… the list goes on.
And why not—you deserve it, right? Your kids are almost out of college. Your house is nearly paid off. You’ve been socking away money in your 401(k) and IRA for years, and your savings account is not too shabby, either. You’ve got it made in the shade come retirement age, right? Well, maybe.
It’s great to have confidence in your plans for those golden years, but it’s also important to be realistic. Sometimes the assumptions you make about retirement are just that—assumptions.
Here are five myths that could derail those well-thought-out travel plans:
Myth #1: You won’t need as much money when you’re retired.
Au contraire. If you’re like the rest of us, you spend more money during your free time, not when you’re working. And you’ll have plenty of free time when you retire. Remember that trip to the South Pacific or Reykjavik? It’s going to take some big bucks.
Sure, you’ll likely have your debt paid off by the time you retire and you’ll probably have fewer bills, but there are other things that are going to cost you. What about maintenance on your house? It got older just like you did and you can rest assured that some repairs will be necessary.
It’s also true that you’ll have Medicare, but you’re still going to have to shell out for supplemental insurance or pay out of pocket for dental, vision, and hearing healthcare.
Myth #2: Your income tax bill will be lower.
If you think you’re going to be in a lower tax bracket because you’ll be getting by on less income during retirement, well, think again. As covered above, you’re probably going to need the same income when you retire as you do now, and you’ll likely have fewer income tax deductions than in the past. For instance, if you pay off your mortgage, you can kiss that deduction goodbye. And remember, the money you withdraw from your 401(k) will be taxed, too.
Myth #3: You’ll downsize to save money.
This is a good plan in theory, but it could backfire on you. Be wary of condos and “modern living” apartments with all the latest bells and whistles that wind up costing you more than the homestead you just sold in order to downsize.
Myth #4: Now that you’re retired you won’t have to pay your kids’ (or parents’) bills any longer.
Ha! If you believe that one, I have a great bridge for sale. A lot of young people are still living – or have moved back – into their parents’ homes, rent-free. If that happens, who do you think is going to pay for their food, clothing, and who knows what else? Alternately, even if your kids are out on their own successfully, you may find yourself wanting to help them along as they navigate some of the biggest expenses of early adulthood: buying a car, planning a wedding, putting a down payment on a house, preparing for your first grandchild, and so on. Additionally, don’t forget about your elderly parents or your spouse’s parents -- you may want or need to help them out with their living or healthcare expenses as well.
Myth #5: You’ll just keep working until you keel over.
That’s a lofty and noble ambition, but highly unlikely. More than 25% of workers say they plan to work until they turn 70, and 10% say they don’t ever plan to retire, according to a recent study by the Employee Benefits Research Institute. But you know what they say about the best laid plans. Any number of things can happen to you or your spouse to throw a monkey wrench into those plans, including illness and lay offs.
Okay, you get the point. Now that I’ve given you the bad news, here are five things you can do to be sure you get to see a magnificent sunrise in Pape’ete or the breathtaking Northern Lights in the Land of Fire and Ice.
- Increase your contributions to your retirement accounts. If you’re an employee with a 401(k) or 403(b), contribute until you max out your annual limit of the plan. At the very least, if your employer has a matching program, you should invest any percentage your company agrees to match (usually about 4% or 5%).
- Participate in a pre-tax 401(k) to benefit from tax breaks. If your employer offers a Roth 401(k), you could be saving money that will be tax-free when you reach retirement age. A Roth 401(k) allows you to contribute with after-tax dollars, and you can withdraw that money – as well as your earnings – tax-free when you retire.
- Put some extra money aside to cover your future healthcare needs as well as any other unexpected expenses that crop up, such as your kids moving back home or your parents moving to an assisted living facility.
- Review your insurance plans and supplement them, if necessary. It’s important to have long-term disability insurance. This way, if you become disabled as you age, you won’t have to dip into your retirement fund to cover the extra expenses. Life insurance is also important for both spouses. If your spouse passes away, you may need the extra money from the life insurance policy to take care of your family without depleting your retirement account. Term life insurance isn’t too expensive if you’re healthy. Finally, be sure that your assets are protected with auto and homeowners insurance.
- Chat with a financial advisor to get answers to any lingering questions about your retirement plan.