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5 money misconceptions that American retirees make over and over again

5 money misconceptions that American retirees make over and over again
5 money misconceptions that American retirees make over and over again

Many Americans aren’t up to speed on financial topics related to retirement — at least according to a recent survey.

Only 40% of the questions about retirement savings, Social Security and Medicare were answered correctly in a survey by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC).

Many respondents also had misconceptions about the average American’s life expectancy, resulting in “very real retirement savings gaps.”

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Planning for retirement is complex, and it might be worthwhile to reach out to a qualified financial advisor. But it also pays to make sure you’re retirement-literate.

Here are five common misconceptions highlighted by the survey — and how to course-correct.

1. Employer matching

Most respondents failed to recognize the advantages of a workplace retirement savings plan that offers an employer match — including the fact that it can increase your retirement savings contributions and the size of your nest egg.

Employer matching means that, when you contribute to your 401(k), your employer contributes an additional amount, which is typically a percentage of your contribution (up to a maximum amount). The maximum is usually set as a percentage of your salary, but could also be a dollar amount in some cases.

There are several matching formulas, but a common structure is for an employer to match 50% of contributions up to 6% of your salary.

So, if you make $100,000 per year and contribute $1,000 per month to your retirement savings plan, your employer would contribute $500, or 50% of each contribution, up to $6,000 per year.

Over the course of a 40-year career, that additional $6,000 per year would add up to $240,000 of free retirement money — and that’s before any investment returns.

2. Annuities

Roughly half of the survey respondents knew that an annuity investment could offer guaranteed lifetime income. It can also help defer taxes, ensure that you don’t outlive your retirement savings and protect your retirement income from market fluctuations.

Essentially, you buy an annuity from a life insurance company, which can be funded with one lump sum or by invested money over a period of time. The purchase is made with pre-tax dollars; your funds will then be invested and any growth will be tax-free. (However, withdrawals are taxed and there’s a penalty if funds are withdrawn before you’re 59½.)

In return for your purchase, you’ll receive a regular stream of payments in your retirement. You could opt for an annuity with a set number of payments, with guaranteed income for life or with guaranteed income for the life of a surviving spouse.

You could also receive payments as a guaranteed fixed amount or a variable amount based on the performance of underlying investments. They could also be indexed, where a portion of the payout is based on an underlying index such as the S&P 500.

Read more: Jeff Bezos and Oprah Winfrey invest in this asset to keep their wealth safe — you may want to do the same in 2024

3. Social Security benefits

Almost 60% of respondents didn’t know Social Security benefits last a lifetime. Anyone who has paid into Social Security for at least 10 years is eligible to start claiming benefits as early as age 62.

You’ll receive higher benefits for each year you wait to claim beyond age 62, up to age 70. The benefit amount is calculated based on your 35 highest-earning years.

Once you claim benefits, you’ll receive them for the rest of your life, but it’s unlikely that Social Security benefits alone will be enough to support you during your golden years, so it’s a good idea to have other sources of retirement income.

After all, the average monthly benefit for retired workers was $1,915.26 as of April 2024.

4. Life expectancy

The majority of Americans aren’t clear about the average life expectancy, according to the survey results. People are living longer and, according to the Centers for Disease Control and Prevention (CDC), the average life expectancy in the U.S. after age 65 is 18.9 years.

For men, it’s 17.5 years; for women, it’s 20.2 years. However, many of us can expect to live longer — maybe even much longer, in some cases.

Some ways to increase your nest egg include saving more money while you’re working. (Again, finding an employer with a good 401(k) matching program can help with this). You can also try claiming your Social Security benefits later, because the monthly benefit will increase up to age 70.

You might also consider deferred annuity products that start paying out later in life. These include Qualified Longevity Annuity Contracts (QLACs), which allow you to purchase a deferred annuity with funds from a qualified retirement plan such as a 401(k) or an IRA — and allow you to delay distributions up to age 85 without violating IRS required minimum withdrawal rules.

5. Medicare

Some survey respondents were also unfamiliar with Medicare — and, to be fair, it can be quite confusing.

If you’ve paid into Medicare for at least 10 years, Part A (hospital insurance) is free, but there’s a deductible of $1,632.

Part B (medical insurance) is $174.70 per month, which can change each year. Premiums for Part D (drug coverage) and extended coverages depend on which plans you choose.

However, Medicare only covers two-thirds of healthcare costs. To cover your remaining fees, you’ll need to include that in your retirement planning. It may be worth looking into whether you qualify for a tax-advantaged Health Savings Account (HSA).

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.