Retirement savings is often a touchy subject for those inching closer to the day when they clock out for the last time. After all, the field is rife with anecdotal evidence and outdated information that seems to dictate the conversation about retirement savings. This leads retirement-ready workers to think that they are going to have a very comfortable retirement or be unbelievably impoverished, when the opposite could be true.
We take a look at five retirement myths below.
"Social Security will be enough."
This might be true if you have a frugal household with little to no financial obligations to others. The average Social Security benefit in June 2011 was $1,180 a month, which is a stretch for households whose obligations might include a mortgage, insurance, and living expenses.
Financial experts recommend using Social Security as a boost to your monthly income rather than the sole, or even primary, means of income. Do get a good look at what you can expect your Social Security payout to be, AARP has a calculator that determines your expected monthly payment.
"My 401(k) will be enough."
Similarly, your 401(k) alone will most likely not be enough to cover your monthly expenses in retirement. Also, deciding how much to take out once you reach retirement age is also wrought with issues. Take out too much and you risk running the well dry; too little and you won’t have enough to cover expenses.
Financial planners suggest diversifying your private retirement accounts with Roth or traditional IRAs. This gives the individual more freedom to invest their money as they wish, although it lacks the employer-matching that has made 401(k)s so ubiquitous among workers today.
"College savings should take priority."
Funding large parts of a child's tuition can not only be bad for the parents, but for their children as well. Taking a large financial hit so their children won’t have to take out student loans means that parents will have less money to accumulate interest, making it more difficult to find retirement funds. This could eventually lead to their children shouldering the financial burden, supporting their parents later in life.
After all, it’s much easier to borrow for college than it is for retirement.
"It’s too late/early for me to start saving."
The best time to start saving for retirement is right now.
Although most workers in their early twenties might find it difficult to start saving early in their careers, this time period is crucial for getting a head start on your retirement accounts. A young adult saving $200 per month and earning 6% on saved funds will have roughly $550,000 at the age of 65. But at the age of 40, saving the same amount with the same earnings rate will yield just $138,600 at age 65.
So what if you are in your forties with no savings? Sure, you won’t have the advantage of the younger crowd, but there is still hope. Some strategies include starting an IRA on top of a 401(k), stashing away extra money you receive due to a raise or bonus, downsizing your home and lifestyle, and finding extra means of income. You can read more about jumpstarting your retirement savings here.
"I should pay off my debt before I start saving."
There is no doubt that debt can be an enormous financial and emotional strain. However, in most cases debt should not be the reason to delay saving for retirement. The goal should be to pay off your debt while contributing towards your retirement account. Time is your best friend and worst enemy when it comes to retirement savings, so anything you can contribute to it will reap its rewards when it’s finally time to cash out and enter the next stage of your life.