7 Common Assumptions About Retirement Planning
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Retirement planning can seem like a never-ending activity. Financial experts advise people to start saving for retirement as early in life as possible. A process this long is bound to create some misconceptions in your mind. Keeping up with market fluctuations, the changing state of the economy, rising and falling real estate prices, etc., can be challenging. Sometimes you may think you are on the right path, but in reality, you could be headed in the opposite direction. With so many factors to think about, sometimes people end up believing in the many faulty assumptions surrounding retirement planning.
7 Most Common Assumption of Retirement Planning and Why You Should Not Fall for Them
1. Retirement comes with reduced costs
People assume that retired life is a simple life. They consider retirement to be less expensive and a phase of reduced social interactions and fewer material needs. But this is only true to an extent. Indeed, you will probably step out less for dinner parties, as you did when you were younger, but the overall costs of retirement are pretty much the same, if not more. Newer costs like healthcare, children’s or grandchildren’s education expenses, and travel can be added to your list of expenditures. Retirement does not come with reduced costs; it comes with a different set of costs. The end result pretty much stays the same.
2. Retirement is a short phase
Let us do some math here. If you start working at the age of 25 and retire at the age of 60, you have a working life of 35 years. Now if you retire at 60 and live on to 90, you have a retirement life of 30 years. In essence, there isn’t much difference between these two phases of your life. You shouldn’t have a morbid approach to retirement. There is a reason why they call it the ‘golden years’. Just like any other time, retirement too can be just as fulfilling and lively.
3. Your spouse does not need a power of attorney
This is especially common in couples where only one partner is the wage earner of the family. Consciously or unconsciously the majority of assets are in the name of the earning spouse. In the absence of a power of attorney, the other spouse will not always inherit the assets. In fact, the widowed partner will have to reach out to the court for possession of the estate. This can end up costing them a lot more than the cost of a power of attorney. Similarly, if you share a common account in the name of one spouse, the other partner will have to go via a probate to claim those funds. Do not assume that as partners, you are legally bound to inherit all of your spouse’s assets when are no longer around.
4. Your tax liabilities will reduce
People tend to assume that since they would not be drawing a monthly salary any more, they would not be obligated to pay as much tax. But withdrawals from some retirement accounts are also taxed as regular income. Your tax liabilities will not necessarily reduce in retirement, but a good way to prepare yourself would be to invest in the right retirement account from the start. You can pick an account where your contributions are taxed instead, so your tax liabilities are reduced in retirement.
5. You can use your money as you please
It may sound unfair since the money belongs to you, but there are rules and regulations to how you can use your savings. Every account has an age criteria, a minimum required distribution, and different rules for penalties. For example, a 529 plan is specifically used for education costs, a Roth IRA, on the other hand, can be used for various other expenses, but there is still a 10% penalty for withdrawing funds before the age of 59 ½. After the age of 70 ½, tax-deferred accounts mandate owners or beneficiaries to make required minimum distributions in a timely manner or else you can face a 50% penalty for every penny that is not withdrawn. You must keep these rules in mind, so you don’t end up losing your money to taxes and penalties in case of an untimely withdrawal.
6. Inflation is over-rated
When people assume that their expenses will substantially drop in retirement, they also tend to ignore inflation. Some people also feel that they can counter the rising costs of inflation, since they won’t have other expenses to worry about. But inflation can quickly throw you off your game. It is also important to note that inflation may affect different sectors differently. For example, the cost of real estate may not fluctuate in the same manner as the cost of healthcare. Now which of these affect you more at a later stage in life is debatable, but as a precaution, you should always aim to save more to be able to cover all probable costs.
7. There is enough time to save
The cardinal mistake made by many is to assume you have enough time left to start saving for retirement. If you break down the process of saving, you will realize that in the 30-35 years of your working life, you are required to not only save for the next 30 years of retirement, but also maintain your current lifestyle. This can certainly seem like a huge load on your head, but if you spread it out wisely, your ultimate goal can be achieved. Postponing the process and assuming you still have time left, can put you in a pickle later.
To sum it up
Jumping onto the bandwagon of retirement savings, as early as possible, will ensure that you and your family have a financially secure life. This will also bring a sense of confidence and peace into your life. Don’t fall for these assumptions and try to avoid these mistakes as much as you can.
It is also better to seek professional help instead of being unsure and committing blunders. Reach out to financial advisors to make sure you are not making incorrect assumptions that can cause trouble later.