Managing your finances can be complicated, and there’s endless advice out there about how to best handle your money — especially when it comes to investing and preparing for retirement.
While a lot of it is good advice, some of it can steer your retirement in the wrong direction. These three myths may seem harmless, but they can ultimately throw off your entire retirement plan.
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1. Safe investments are ideal
Everyone wants to protect their money, so it makes sense to want to stash your cash in the safest investments possible. Especially if you were burned during the Great Recession, you may think it’s best to avoid the stock market to prevent another major loss.
But so-called “safe” investments can actually be riskier over the long term than investing in the stock market. Less risk also usually leads to less of a reward, and lower-risk investments, such as CDs and money market funds, typically see returns of only around 2% to 3% per year. And even the best savings accounts have interest rates of just 2%. With inflation hovering around 2% to 3% per year, that means your savings might not even grow enough to keep up with rising costs of living. In other words, your money could actually be losing value the longer it sits in these “safe” accounts.
The stock market, although it has its ups and downs, typically offers much higher returns over the long run. The key is to invest in low-cost index and mutual funds, which in general are safer alternatives to investing in individual stocks. These types of funds spread your money across dozens or even hundreds of different stocks, limiting your risk while still earning average rates of return — around 7% to 10% per year.
That’s not to say you shouldn’t have any lower-risk investments. A strong, diversified portfolio has many different types of investments to create a healthy balance. But if you put the majority of your money toward low-risk investments, you likely won’t see the returns you need to reach your retirement goals.
2. Your expenses will decrease in retirement
One of the first steps when preparing for retirement is to figure out how much you expect to spend each year. Many people assume their costs will go down, predicting they’ll only be spending around 70% to 80% of their pre-retirement income.
That may be true, as some costs will be eliminated once you leave your job. You won’t pay to commute anymore, for example, and you’ll probably be spending less on dry cleaning and other work-related expenses. But you may be spending more in other areas.
Retirement is essentially one long vacation, which means you have plenty of opportunities to spend money. It may be more tempting to go shopping every afternoon simply because you can, or you might want to take a monthlong trip to the beach because you no longer have to worry about using up all your vacation days at work. If you don’t set a limit on your spending, it can quickly get out of control.
You may also be spending more on healthcare in retirement than you did while you were working. Planning for healthcare costs can be tricky, since you won’t know exactly what you’ll face. You at least have to budget for premiums, deductibles, and co-insurance (even with Medicare coverage), which can cost thousands of dollars per year. In the early years of retirement when you’re relatively young and healthy, healthcare costs might be minimal. But as you age and your health starts to decline, your expenses can increase quickly.
3. Long-term care isn’t a priority
When you’re excited about beginning a new adventure in retirement, the thought of spending your final years in a nursing home is probably the last thing on your mind. But seven in 10 older adults will need long-term care at some point in their lives, according to the U.S. Department of Health and Human Services (HHS), so it’s important to think about how you’ll cover these costs.
You may decide to put off worrying about that expense until the need arises. After all, why prepare for something you’re not even sure you’ll need? However, long-term care is incredibly costly, and not preparing for it could drain your retirement fund in a matter of months.
The average stay in a semiprivate room in a nursing home costs roughly $6,800 per month, according to HHS. That amounts to around $82,000 per year. Also, of those who need long-term care, 20% will require it for at least five years. With a price tag of $6,800 per month, that comes out to around $408,000.
The kicker is that Medicare usually won’t cover long-term care, so the money will need to come straight from your savings. And considering that most people won’t need nursing home care until their final years, there’s a good chance your savings will have run dry by then.
Long-term care insurance can help cover some of these costs, but you’ll need to enroll relatively early. This insurance is known for its sky-high premiums, so you can expect to pay a couple of thousand dollars per year for coverage. But if you wait until you’re already retired or need long-term care, you’ll face even higher rates or be denied coverage altogether.
Separating fact from fiction is crucial when preparing for retirement; even one seemingly harmless mistake could cost you thousands of dollars. But by doing your research ahead of time, you’ll be able to enjoy your later years to the fullest.