Debunking Common Retirement Savings Myths

May 26, 2022

How’s your retirement planning going? No matter what stage of life you are at, investing in your retirement fund is important. There are many unforeseen challenges that could make retirement planning difficult, including reduced Social Security and Medicare benefits, higher taxes and inflation rates, fewer traditional pension plans, lower market returns, and rising life expectancies and health care costs. Let’s talk about — and debunk — some common retirement planning myths.

Retirement planning is for older people.

Retirement naturally feels incredibly far off for young people beginning their careers. This is only reinforced by communication from employers and the financial industry that’s aimed at those approaching retirement. In addition, this generation grew up during a time of instant gratification when you could find the answer to almost any question with a few thumb clicks, but retirement planning is a long, slow process that may not pay off for decades.
Starting early can have a dramatic impact on retirement preparedness, not only because it means saving more over your lifetime but also because those savings have a longer time to grow and compound. Even if you can only start with 1% of your income, it’s better than nothing and helps build the habit of retirement saving.
I don’t have to think about retirement; my employer automatically enrolled me.
Automatic enrollment has helped many young people get started in their 401(k) plans, but it can also lull you into a false sense of security that you’re saving for retirement. That’s because the average automatic enrollment rate is 3%, far less than the 12-15% experts say a typical employee should be saving (including employer contributions). Make sure you are contributing at least the maximum percentage that your employer will match up so you aren’t leaving that free money on the table as well.
I need to pay off my student loans first.
This is understandable. After all, no one likes having to make debt payments every month. However, student loan rates tend to be relatively low, and for many taxpayers, the first $2,500 of interest paid is tax deductible. If your loan rates are less than 5-7% after taxes, you could probably earn more by investing in your 401(k) than you would save in interest by paying down those student loans early. On the other hand, if you have credit cards or other high-interest debt above 5-7%, it does make sense to pay them off first.
Investing is too complicated.
Many young employees may be intimidated by having to pick investments. Fortunately, a growing number of retirement plans offer investing advice tools and options to help simplify the process. These can be ideal for young people with little money outside their retirement accounts and little interest in researching and managing investments.
I’ll never be able to save enough for retirement.
You may not be able to save much early in your career, but that can change as your income rises and your money management skills improve. If your retirement plan offers auto-escalation, consider taking advantage of it. With this feature, you can have your contribution rate slowly increase over time. You may not even notice the difference in your paycheck, but pretty soon you could be saving more than you ever thought was possible.


Tags: Retirement, Savings, Money Management