Top Retirement Myths

It's easy to think that retirement is far enough off that there's time to think about it later. But you know what? That time between now and later is a resource that shrinks every day. The earlier you make conscious decisions about saving for retirement, the easier the process is. And what's more important than the rest of your life?

Myth: Saving for retirement isn't that important when you're just starting out.
The Facts: Start participating in a 401(k) as soon as possible! The effect of compounding can help your money grow significantly if you start young and contribute consistently. Also, if your employer matches all or part of your contribution, you're getting money that you otherwise would not have had access to.

Myth: You need to replace 100 percent of your current income in retirement.
The Facts: The financial services industry tends to recommend replacing between 70 to 85 percent; because you can subtract the money you've been setting aside for retirement, as well as that for work expenses, and a certain amount for taxes. That said, even this estimate may be high, because in retirement you probably won't have children under your roof, tuition payments will end, and your mortgage may be paid off. On the other hand, if your retirement plans include extensive travel, you must factor that in, and you must also plan for how you will pay your health care expenses.

Myth: "If I save as much as my parents did, my retirement will be secure."
The Facts: Today's workers need to save more. We're living longer, often do not receive a pension, and face health care costs as well as probable high fuel prices.

Myth: Family inheritance is a reliable source of retirement income.
The Facts: Don't rely on it. Baby Boomers' parents are living longer and thus shrinking or depleting their assets in many cases, leaving less for heirs.

Myth: 401(k)s have helped workers save the bulk of what they need for retirement.
The Facts: In 2004, the average person close to retirement had only $60,000 in 401(k) and IRA accounts, or less than $400 per month for retirement.

Myth: Your house's equity can finance your retirement.
The Facts: It's easy to think that what may have been your biggest investment during your working years can support you in retirement, but in truth, home equity isn't easily accessible for daily living expenses. You need somewhere to live, so your access to that equity could be through a reverse mortgage or through the sale of your home to move to less expensive quarters.  Reverse mortgages typically give homeowners of retirement age access to slightly less than half the value of their home, and their ultimate repayment usually requires sale of the home, thus impacting what is left to heirs.

Myth: Social Security will pay 42 percent of an average worker's earnings.
The Facts: Social Security replacement rates will drop to 30 percent by 2030.

Myth: Medical expenses and nursing home costs will be taken care of by Medicare.
The Facts: Most nursing home care is custodial, which is not covered by Medicare. As a matter of fact, Medicare pays only about half of retirees' medical bills, so retirees are responsible for protecting themselves and their assets with strategies like purchasing supplemental health insurance and long-term care insurance to minimize financial risk.

Myth: It's impossible to save enough for retirement.
The Facts: If, all though your working years, you set aside 6 percent of your paychecks (with a small employer match), and invest wisely, you should be okay.

Myth: "It's too late for me to start saving for retirement."
The Facts: You may need to adjust your lifestyle, but saving just a little extra each year and investing it can add up. Try to make the maximum $3,500 annual contribution to an over-50 IRA. You may also consider gradual retirement: the money has more time to grow. Also, when the date at which you start collecting Social Security is delayed, the income increases.