When it comes to financial planning for retirement, there are a lot of myths out there to sidestep. Falling victim to myths could set you back from reaching your goals—or take a bite out of your nest egg or income after you retire. Check out these six common myths that could impact your retirement financial planning.
MYTH #1: When it comes to retirement accounts, “set it and forget it” is best.
REALITY: It’s best for investors to be involved with their plans.
When setting up retirement accounts, many investors take on a “set it and forget it” strategy in which they create their investment portfolios and then leave them alone. While this strategy is good for making regular contributions and avoiding obsession over market fluctuations, it’s best for investors to be involved with their plans. One major reason is because laws surrounding retirement accounts periodically change, requiring investors to react and make changes—or possibly face financial consequences.
For example, major changes could be coming to retirement accounts over the next several years if certain proposed legislation is passed. Among the changes, reforms would potentially eliminate Roth strategies for the wealthy and add new rules for individuals with retirement savings over $10 million. In response, some investors are making conversions in 2021 in case the legislation passes.
MYTH #2: Social Security is exempt from taxes.
REALITY: For most Americans, Social Security is taxable.
The majority of Americans who receive Social Security benefits pay federal income tax on up to half or 85% of that money because their combined income from Social Security and other sources pushes them above the very low thresholds for taxes to kick in. In addition, there are 13 states that tax Social Security benefits. Being aware of federal and state Social Security tax laws can help you limit how much tax you owe.
Check out this blog post for more Social Security myths!
MYTH #3: Medicare covers just about everything.
REALITY: Medicare covers many basic health care needs, such as hospital stays, lab tests, doctor visits and preventative care, but it doesn’t cover everything.
Many Medicare beneficiaries are surprised to find out that Original Medicare doesn’t cover most prescription drugs; dental, vision or hearing care; or care outside of the United States. For this reason, many Medicare beneficiaries choose Medicare Supplement insurance or a Medicare Advantage plan to protect their budgets from out-of-pocket health care costs. In addition, Medicare doesn’t cover long-term care, which is why many retirees rely on long-term care insurance to protect their assets from the high costs of long-term care.
MYTH #4: Maximizing my 401(k) contributions is enough for retirement.
REALITY: Depending on your age and ability to save for retirement, you might not be on track by contributing to your 401(k) only.
Employer-sponsored 401(k) plans are extremely valuable as tax-advantaged retirement savings tools, but it may not be possible for you to set aside enough for a comfortable retirement because of IRS limits, inflation and taxes. That’s why it may be important for you to build in other provisions, such as making separate, regular contributions to a traditional or Roth IRA.
MYTH #5: My taxes will be reduced in retirement.
REALITH: Possibly, but it all depends on your adjusted gross income (AGI).
Your AGI determines what tax bracket you’re placed in, whether you pay taxes on Social Security benefits and how much you pay for Medicare premiums. With a lower AGI, you may keep more of your retirement income for yourself. Sometimes, retirees can keep more of their money by having less income.
MYTH #6: I can get rich quickly by investing in speculative assets like cryptocurrency.
REALITY: It may seem like investors become millionaires in no time, but it’s nearly impossible.
If you’re behind on your retirement savings, dabbling in speculative assets is not the way to make up time and get rich quickly. Having an appropriate asset allocation and sticking to a long-term plan are better ways to set yourself up for long-term success.
We’re here to help you bust myths and plan for a secure retirement!
Being aware of common myths can help you improve your financial security in retirement. Working with a financial representative can help give you confidence knowing that you’re making smart decisions and preparing for a secure future. A Bankers Life financial representative can be by your side every step of the way helping you be confident in your strategy. Learn more about our services here.