Retirement Income Myths to Ignore

There are many misconceptions about retirement income that could derail your plans. Here are some common myths to ignore:

Myth: Social Security will cover most of my expenses

Reality: Social Security was never meant to be your primary source of retirement income. Even with the maximum benefit at retirement age, Social Security will likely replace just 40% of your pre-retirement income. You’ll need other sources of income to cover most of your expenses.

Myth: I can withdraw 4-5% of my savings annually in retirement

Reality: The “4% rule” is based on historical returns and doesn’t account for sequence of returns risk or longevity risk. A more conservative withdrawal rate of 3-3.5% is often recommended to reduce the chances your money runs out. Adjust your rate based on your individual situation.

Myth: I’ll be able to live off the returns from my investments

Reality: While investment returns can help fund your retirement, you’ll likely need to tap into your principal at some point. Even conservative investments may only provide returns of 3-5% annually, which is often less than the actual spending rate needed in retirement.

Myth: I can rely on pensions to cover most of my expenses

Reality: While pensions can provide a valuable source of income, they are becoming less common. Even for those with pensions, they typically replace just 40-60% of pre-retirement income. Other savings will still be needed.

Myth: I’ll be able to cut my spending significantly in retirement

Reality: While some expenses like commuting costs disappear, others like healthcare and housing tend to increase. Seniors spend a higher percentage of their income on necessities with little room for cuts. Plan for your spending to stay the same or increase in retirement.

Myth: My retirement savings will last forever

Reality: Even with the best-laid plans, there are many variables that can impact how long your money lasts. Unforeseen events, taxes, and inflation all pose risks. Have a strategy in place in case you live longer than expected or your investments underperform.

Myth: I’ll be able to work part-time during retirement

Reality: Part-time work is not a reliable source of income in retirement. Many retirees struggle to find jobs due to age discrimination or health issues. Plan conservatively and don’t count on significant income from work.

Myth: I’ll be able to downsize to a smaller home

Reality: Downsizing can provide a valuable influx of cash, but it’s not a reliable income stream. Transaction costs, moving expenses, and the time it takes to sell a home make this a one-time boost, not a monthly paycheck.

Avoid common retirement income myths by planning conservatively, diversifying your sources of funds, and building bigger nest eggs. The more informed you are, the better prepared you’ll be for a financially secure retirement.