The first day of retirement is a day millions of people dream about as they look forward to finally relaxing and enjoying the rest of their lives after decades of hard work. An estimated 10,000 members of the “baby boomer” generation retire and begin receiving Social Security and Medicare benefits each day.
At least, that’s the theory. In reality, a significant number of people will retire based on a misconception or outright myth, which could greatly reduce their quality of life in retirement. It may even be necessary to come out of retirement just to earn enough money to live comfortably. We look at five of the most commonly espoused myths.
1. Medicare Is All the Healthcare Protection You Need
As of mid-2015, approximately 55 million people received Medicare, over 80 percent of whom were seniors aged 65 years and over. As you likely know, Medicare helps you when paying for certain medical expenses during retirement. Original Medicare includes Part A (hospice, skilled nursing facility care, and inpatient procedures, among other things) while Part B covers outpatient services. You can also add Part D prescription drug coverage.
A common mistake is assuming that Medicare covers all medical needs. In fact, it only covers 80 percent of “eligible” medical costs under Part B, and you must pay the other 20 percent as coinsurance. If you need cancer immunotherapy that costs $200,000, for example, you must pay $40,000 out of pocket, assuming Part B covers it. Add the costs of Part D coinsurance and the bills can add up if you’re not prepared.
What Can I Do?
Look into a Medigap or Medicare Part C (also known as Medicare Advantage) plan that enables you to combine Parts A, B, and D along with dental, hearing, and vision in a single solution. Medigap is excellent for reducing the amount you pay in coinsurance, while Medicare Advantage has a maximum out-of-pocket expense of $6,700 in 2016 (24 percent of plans have a limit of $3,400 or less). By adding an extra plan, you can cover all your medical needs and avoid unpleasant surprises.
2. Social Security Can Cover My Retirement Expenses
This myth suggests Social Security provides you with enough money to cover practically all of your expenses in retirement. In fact, Social Security will probably only cover 40 percent of your expenses. You have to handle the rest yourself in the form of investments, pensions, and savings.
While the maximum Social Security benefit in 2016 is $2,639 a month, few Americans are eligible for this amount. In order to receive the highest benefit, you need to have an income at or above the earnings ceiling over a 35-year period (Social Security calculates by combining your best 35 years of income). The annual earnings ceiling in 2015 was $116,800. You can boost your Social Security income by retiring later, but this could mean working until the age of 70.
In reality, the average monthly benefit for all retired workers is $1,341 in 2016; this equals $16,092 annually. In light of the fact that the Federal Poverty Line is $11,770 per annum, it’s clear that Social Security cannot come close to covering your expenses. If your spouse is also collecting benefits, your monthly income may jump to almost $2,200, but this is still far from enough to enjoy a “comfortable” retirement.
What Can I Do?
The simple answer: plan ahead. If you rely on Social Security to form over half your income, you may see your savings suffer in the event of a medical issue. You should begin building your nest egg as early as possible, and invest wisely.
3. Seniors Need 80-85 percent of Their Pre-retirement Income
The trouble with “one size fits all” statements such as this is that they don’t account for everyone! The 80-85 percent rule should hold firm in most cases, although certain financial experts believe you need even more in order to guard against financial issues such as high-cost medical conditions.
The idea behind the above figure is that you shouldn’t need to curb your spending habits in your golden years, and certain retirement income is not subject to the same taxation as pre-retirement salary.
What Can I Do?
Don’t be like the 33 percent of Americans who have saved $0 for retirement or the 56 percent who have saved less than $10,000. It’s best to save early and be aware of just how much you really need. On average, Americans aged between 55 and 64 have $104,000 saved for retirement. At face value, this may seem like a sizable sum. However, in reality, for those who invest in a lifetime annuity, it is only approximately $310 a month.
Rather than adhere to a specific percentage of your income, create a tailor-made financial plan and begin to save accordingly.
4. Avoid the Stock Market
This myth suggests that the stock market is akin to shark-infested waters and that seniors should leave it alone. While the stock market is volatile and can eat into your savings if you make a couple of bad moves, it tends to recover after major lows and may even reach new highs.
What Should I Do?
Don’t invest any cash that you’ll need in the short-term (5-10 years) because of the aforementioned volatility. However, don’t avoid the stock market altogether because your retirement may last 30 years. Keeping your cash away from the markets could be a mistake.
The stock market is unquestionably a realistic option for long-term cash. According to Vanguard, the stock market has averaged annual gains of over 10 percent from 1926 to 2015. Additionally, bear in mind that this figure includes the recent recession and the Great Depression, so the gains are actually higher during boom times. In contrast, much-vaunted bonds have only increased by a little over five percent during the same period.
5. You Can Work Beyond 65 if You Want
Many people seem to believe they can simply work until they have finally earned enough to retire, even if this means working into their late sixties. Unfortunately, you can’t predict the future, and according to the Employee Benefit Research Institute, almost half of retirees leave the workforce sooner than anticipated. The main reason was disability or a health problem, but other reasons include forced retirement due to downsizing and caring for a loved one.
What Can I Do?
You can’t rely on the potential for earnings beyond the traditional age of retirement. Instead, you need to create a savings plan that assumes you’ll leave the workforce earlier than you intended.
Retirement is a time of relaxation and happiness. The hard work is complete; now, you get to reap the rewards. The best way for this to happen is forward planning, so get your savings and medical coverage in order as soon as is realistically possible.