Saving 10% of your income is common advice you’ve probably heard before, but unfortunately, it may not prepare you for retirement.
When planning for retirement, it is important to have a realistic picture of how to meet your future income needs. Unfortunately, many people believe in common myths that underestimate the amount they need to save and the help they get to cover expenses.
You don’t want to be one of them, so make sure you know the truth about these three common retirement myths.
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1. Saving 10% of your income for retirement is enough
Saving 10% of your income is common advice you’ve probably heard before, but unfortunately, it may not prepare you for retirement — especially if you don’t start saving very early.
Let’s say, for example, that your income averages around $51,480 and you get a 2% annual increase until retirement. If you start saving at 35, plan to retire at 65, and earn a 7% annual return, then when you save 10% of your income, you’ll have about until you’re ready to leave the workforce. There would be a savings of $549,643.
If you follow a general rule called the 4% rule, this will give you an annual income of about $21,985 from your investments. You’ll need to replace about 80% to 90% of your pre-retirement income — which would be about $91,420 by retirement age. So even when combined with Social Security, you’re likely to fall short.
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Instead of buying into this myth about saving 10% of your income, it’s best to set a personal savings goal, taking into account when you start saving, your planned retirement date, and your projected Social Security benefits.
2. Following the 4% rule will allow you to withdraw funds safely
Speaking of the 4% rule, this rule assumes that if you withdraw 4% from your retirement investment accounts in the first year of retirement and each year adjust the amount upwards by inflation, you will not run out of funds. Will be
Unfortunately, this rule is out of date and based on outdated assumptions about life expectancy and projected returns that are no longer in today’s world. Recent studies have shown that if future retirees follow the 4% rule, there is a 56% chance of running out of money, and you can’t take that risk.
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Instead, a more conservative 3% rule may be better — or you can take an entirely different approach to deciding how much to withdraw, such as the bucket rule.
3. Relying on Medicare to Take Care of Your Health Care Needs in Retirement
Finally, many future retirees believe that Medicare alone will be enough to pay for all their healthcare needs with little or no out-of-pocket costs.
This is a harmful myth that can deplete your retirement savings. Medicare is full of exclusions; It has a 20% co-insurance cost and doesn’t cover until 65, even though many retired workers leave before that.
The typical senior couple today would need about $300,000 to cover their out-of-pocket health care expenses, and those costs are only going to get higher. Retirees who don’t plan for it can quickly drain their nest egg to meet their medical needs.
It’s important that you plan for care costs, save a fair portion of your income, and choose a safe withdrawal rate as a retiree if you don’t want to get into serious trouble. The good news is, you now know the truth about three common retirement myths that may be leading you astray so you can better prepare for your future.