Retirement is one of the most important goals for most people. Unfortunately, many workers and retirees have an incomplete or misleading picture of how much they need to save, how to invest their savings effectively, and how to make their money last as long as they live. Clearing up common misconceptions about retirement is essential to allow people to fulfill their dreams of a comfortable retirement.
A joint project by LIMRA International, the Society of Actuaries and Mathew Greenwald & Associates identified the following 10 ways in which Americans lack a realistic understanding of retirement saving.
- Saving too little – Most people haven’t tried to estimate how much money they will need for retirement and those who have tried to do the calculation often underestimate their income needs.
- Not knowing when retirement will occur - Many workers will retire before they expect to, and before they’re ready.
- Living longer than planned - As individuals manage their own retirement funds, they may not understand that life expectancy is a very limited planning tool. In fact, some retirees will live long beyond their life expectancies, with a substantial risk of outliving their savings.
- Not facing facts about long-term care – Many people underestimate their chances of needing long-term health care. Relatively few people either own long-term care insurance or can afford to self-insure an extended long-term care situation.
- Trying to self-insure against long life - Although people may find guaranteed lifetime income attractive, in practice they usually choose to receive retirement plan benefits in lump-sum form. They pass up opportunities to get a lifetime pension or annuity, failing to recognize the difficulty of self-insuring their longevity.
- Not understanding investments – Due to the growth of the workplace retirement savings plans, workers are now largely responsible for managing investments for retirement. However, many workers misunderstand investment returns, expenses, and how each investment vehicle works.
- Relying on poor advice – Many retirees and pre-retirees indicate a strong desire to work with a financial professional, yet fail to see this guidance.
- Not knowing sources of retirement income – Workers often don’t understand what their primary sources of income will be in retirement. They may be surprised and disappointed when they try to live on the income that is actually available.
- Failing to deal with inflation – Inflation is a fact of life that workers may deal with through pay increases, but after retirement few people can increase their income to keep pace with the cost of living.
- Not providing for a surviving spouse – Many married couples fail to plan for the eventual death of one spouse before the other.
Identifying these common misconceptions is an important first step. If you recognize yourself in any, or many of these scenarios, take corrective action right away. Get an accurate estimate of your retirement income needs, identify your sources of income after retirement and understand your investment and distribution options. Take the time to educate yourself in areas of personal finance and retirement planning, and if needed, seek advice from a professional.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.