There are many unknown factors when it comes to retirement, especially if your proposed retirement date is a decade or more away. Though we can't predict the future, we can dispel some myths that make retirement planning seem more daunting than it really is. Here are ten retirement myths to look out for.
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1. You don't make enough money to save for retirement. This common excuse for not investing is true for some people, but it's a myth for many of the people who use it. The truth is that many people simply live beyond their means. If you want to save money for retirement, you need to make it a priority by including it in your budget and paying yourself first through payroll deductions or other automatic payments.
2. You need a large income to become wealthy. False. You need to consistently spend less than you earn and invest the difference to become wealthy. Even someone with a modest income can become a millionaire when they save diligently and invest wisely over a long period of time.
3. You will earn 11 percent in the stock market every year. The statement, "Past performances do not guarantee future returns," is featured prominently on just about any investment prospectus. The stock market as a whole returned approximately 11 percent per year over the last 100 years or so, but those returns are not guaranteed. Just take a look at the market over the last two decades. Solid returns can be had, but it's a good idea to temper earnings expectations.
4. Your money is safer out of the market. The market took a beating over the last two years, and hasn't gained much over the last decade or two. But how much would you have made if you left your investments in an online savings account? Very little. A balanced portfolio is the best way for most people to diversify their investments and gives them the best opportunity for growing their wealth.
5. You can do better by investing on your own. Very few people, including professional money managers, are able to consistently beat the market by investing in individual stocks or other investments. Most investors are better off investing in index funds or mutual funds as part of an overall balanced portfolio.
6. You need to be debt free before you can invest for retirement. This would be true in an ideal world, but most of us live in the real world. Focus on eliminating your high interest debt first, such as credit cards or personal loans. Then invest at least enough to get a company match on your 401(k), while continuing to work on repaying your remaining debt. Increase your investment contributions when you eliminate your remaining debts.
7. A 401(k) is the best place to invest for retirement. Many 401(k) plans have higher fees and fewer investment options than you can find by opening an IRA. That isn't to say 401(k) plans are bad. They offer great tax advantages and an easy way to invest for retirement. It is usually best to invest enough to receive any matching contributions from your employer, then work on maxing out your IRA contributions. If you have additional funds to invest for retirement after you max out your IRA, then work on maxing out your 401(k) contributions.
8. Social Security benefits will be enough to retire on. Probably not. Social Security was never designed to support someone for the duration of their retirement. The program was designed to supplement a retiree's pension or other retirement savings. Social Security benefits should still be around when you retire, but don't count on them being enough to cover all of your retirement expenses. Here are some tips on how to maximize Social Security benefits.
9. You have to retire at age ___. I'll let you fill in the blank. 55? 65? 72? Now I'll ask you, Why do you need to retire at a certain age? This myth exists because many retirees had to wait until a certain age to receive benefits from Social Security or a pension plan. The truth is that unless you work in an industry that has age limits, you should retire when you feel ready and can afford to do so.
10. You won't ever be able to afford to retire. Retirement isn't a dream and it isn't a destination. It's a journey that most people can achieve through hard work and dedication. If you are a long way off, start planning now. If you are close to retirement but don't think it is achievable, then rethink your definition of retirement. Perhaps you can work a few more years before retiring or work part-time in retirement.