When it comes to retirement planning, there’s no such thing as one size fits all.
Don’t fall for the usual clichés about how much money you need to save or what your post-retirement expenses will be. Your retirement plan should reflect not only your financial situation but also your values and dreams.
Here’s some expert advice on retirement planning myths to ignore:
- All you need is Social Security
By now most people probably realize this is a myth, but many still overestimate how much they can rely on Social Security to cover their retirement expenses.
In December 2016, the average monthly Social Security check was $1,360, which isn’t enough to cover all their expenses for most retirees. In fact, the Social Security Administration reports that on average only about a third of seniors’ income comes from Social Security benefits.
Another common Social Security mistake is claiming your benefits too early. If you can put off claiming your benefits until 70, you’ll receive a higher monthly payment. Your spouse and survivors may also be eligible for more benefits, according to Dana Anspach, founder and CEO of Sensible Money, a fee-only registered investment advisory firm in Scottsdale, Arizona, and author of “Control Your Retirement Destiny.”
“Once you look at all the relevant factors, claiming at an earlier age is rarely the best choice,” Anspach says.
- You’ll pay lower taxes
This may or may not be the case, depending on your tax bracket and the source of your retirement income.
“For some folks, taxes increase in retirement,” says Anspach. “If you’ve done a great job of accumulating funds in IRA [individual retirement account] and 401(k) plans, at age 70 1/2, you have to begin taking withdrawals.”
“Each withdrawal shows up as taxable income on your tax return. Many retirees find once they’re over age 70, their tax rate is higher than it was in their mid-career years,” she says. A financial advisor can help you anticipate and minimize these tax burdens.
“I like to see people enter retirement with at least some amount of savings in a tax-free ‘bucket’ like a Roth IRA,” says Jerry Verseput, financial advisor and president at Veripax Financial Management in Folsom, California.
“By having the choice of spending money from a taxable account (i.e. IRA) or a tax-free account, retirees are able to control their tax bracket in higher-spending years in order to be more tax-efficient,” he says.
Another factor to consider: You may no longer be eligible for certain tax deductions – like mortgage interest or college savings deductions – that you took when you were younger. It’s great that you’ve paid off your house and gotten your kids through school – just talk with your tax advisor about which deductions you are eligible for.
- Medicare will cover all your health needs
Medicare provides crucial health coverage for seniors, but it doesn’t cover all of your expenses, including dental care and basic home health care if you’re incapacitated. In fact, a study by the Employee Benefit Research Institute (EBRI) found that in 2012, Medicare only covered 60 percent of seniors’ health costs. The rest was covered out of pocket or through supplemental private insurance.
“Supplemental insurance is highly recommended to fill in gaps and help with copays,” Anspach says. “And expect to pay out of pocket for dental, hearing, vision and alternative care treatments.”
The EBRI study estimated that in 2015 at age 65, the average man would need $68,000 saved up just to have a 50 percent chance of being able to cover his health needs in retirement. Women would need just under $90,000.
- Your expenses will decline
Your post-retirement expenses will depend on what you plan to do while in retirement. If you’re traveling more, your cost of living can actually go up.
“What we’ve found is that spending tends to be significantly higher in the first few years – usually more than people plan for,” Verseput says.
That’s when most retirees are checking items off their bucket list, including travel, new hobbies and spending time with loved ones around the country (or world).
“As clients reach their later years – typically in their 80s – the desire to travel and be away from home for extended periods of time drops, and cash flow requirements drop,” he says.
Even if day-to-day expenses do decline later on, though, many people don’t plan for decades of retirement expenses. As people are living longer lives, it’s likely that up to a third of your life will be spent in retirement. Carefully consider if you’re prepared to live off your retirement savings for 20 to 30 years.
- It’s all about money
There’s a lot more to retirement planning than amassing savings. One of the most important things to consider is what you plan to do with your newfound freedom.
People who stay active (both mentally and physically), engaged and connected to their family and social networks tend to be most fulfilled in retirement. So make sure your retirement plan looks beyond your financial investments to the kind of lifestyle you want.
If you’re someone who gets a great deal of satisfaction from your job, perhaps you aren’t ready to retire. But if you have interests you haven’t been able to fully enjoy because of your busy career, retirement is your chance to dive in.
Mary Purcell covers savings and insurance for MoneyGeek.com.