Managing your finances can be complicated, and there are countless advices on how to best manage your money – especially when it comes to investing and preparing for retirement – it can put your retirement in the wrong direction. These three myths may seem harmless, but they can ultimately ruin your entire retirement savings.
1. Safe investments are ideal.
Everyone wants to protect their money. Therefore, it makes sense to keep your cash as safe as possible. Above all, if you were burned during the Great Recession, you should avoid the stock market to avoid another big loss.
However, so-called "safe" investments can be more risky in the long term than investments in equity market. Lower risk typically results in lower returns, and lower risk assets such as CDs and money market funds generally only return around 2 to 3% per annum. And even the best savings accounts have interest rates of only 2%. With inflation between 2% and 3% per year, this means your savings may not even be enough to keep up with the rising cost of living. In other words, your money could actually lose value the longer it stays on those "safe" accounts.
Although the stock market is up and down, it generally offers much higher returns in the long run. The key is to invest in low-cost index and mutual funds, which are generally safer alternatives to investing in individual stocks. This type of fund distributes your money across dozens or even hundreds of different stocks, limits your risk and still yields average returns ̵
That does not mean that you should not have any lower-risk investments. A strong, diversified portfolio has many different types of investments to create a healthy balance. However, if you invest most of your money in low-risk investments, you probably will not see the return you need to meet your retirement goals.
. 2 Your expenses will decline in retirement.
One of the first steps in preparing for retirement is finding out how much you expect to spend each year. Many people assume that their costs will fall and predict that they will only spend about 70% to 80% of their early retirement income.
This may be true, since there are some costs after ending your employment relationship. For example, they no longer pay travel expenses and are less likely to spend on dry-cleaning and other work-related expenses. However, you may spend more money in other areas.
Retirement is essentially one long vacation, so you have many options to spend. It can be tempting to go shopping every afternoon just because you can, or you may want to take a month-long trip to the beach because you no longer have to worry about wasting all your days at work. If you do not set an expense cap, it can get out of hand quickly.
You may spend more on health care when you retire than during your work. Planning health care costs can be difficult because you do not know exactly what to expect. You must at least plan premiums, deductibles, and coinsurance (even Medicare coverage) that can cost you thousands of dollars a year. In the early years of retirement, when you are still relatively young and healthy, health care costs may be minimal. However, with increasing age and declining health, your spending can increase rapidly.
. 3 Long-term care is not a priority
If you're excited to start a new retirement adventure, the thought of spending the last few years in a nursing home is probably the last thing you think about. However, seven out of ten older adults will need long-term care at some point in their lives, according to the US Department of Health (HHS). Therefore, it is important to consider how you can cover these costs.
You can decide not to worry about these expenses until the need arises. Why should you prepare for something that you are not even sure you need? However, long-term care is unbelievably costly, and failure to do so in a few months could put a strain on your retirement savings.
The average stay in a semi-private room in a nursing home costs about $ 6,800 a month, according to HHS. That's about $ 82,000 a year. In addition, 20% of those in need of care need at least five years of care. At a cost of $ 6,800 per month, that's around $ 408,000.
Medicare usually does not cover long-term care, so the money must come directly from your savings. And considering that most people do not need home-based care until the age of one, chances are your savings will be used up.
A long-term care insurance can help cover some of these costs, but you will need to do so at a relatively early age. This insurance is known for its sky-high premiums. So you can expect to pay a few thousand dollars a year for insurance coverage. However, if you wait until you retire or need long-term care, you will face even higher rates or you will be denied coverage altogether.
The separation of fact and fiction is crucial as you prepare for retirement. Even a seemingly harmless mistake could cost you thousands of dollars. However, if you do your research in advance, you can enjoy your later years to the fullest.