Much of the conventional wisdom about retirement is not based on facts. If you accept these fictions as fact, you take greater risks with your future than you realize. Here are three retirement myths that could jeopardize your retirement security.
1. You will spend less in retirement. Many people think that once they retire, they won’t spend as much money as they did while they were working. Once your house is paid off and your kids move out, you will have eliminated two big expenses. You can also eliminate the costs associated with going to work, such as travel and work attire. But all this cost cutting may not work out as planned. Your children may still require at least occasional financial support. Many people don’t pay off their mortgages by the time they retire because they refinanced the home to pay for college costs for their children or other large expenses. And even though retirees don’t go to work, they have lots of free time to fill up. Often, they spend that time shopping and eating out—two very expensive pastimes.
Many working people spend more money on the weekends than during the week because they have more time to spend. When you retire, everyday is like the weekend. Unless you find part-time work or volunteer opportunities, you may be tempted to go out and spend just to escape the boredom of sitting around the house. Here is how to calculate how much money you need to retire.
2. You should shift to conservative investments as your retirement date approaches. Many people think they have to become very conservative with their investments as their retirement date approaches. But ultra-conservative choices are not the best investments for recent retirees. I’m not saying you should fill your 401(k) with only equities, but I do encourage you to rethink your investment time horizon. If you retire at 65, you have to plan on living another 20 years at least.
Your retirement date has nothing to do with how you should invest. It is much more important to focus on how long you think you will live. At 63, you have to invest so that your money will last at least another 22 years. The fact that you are planning to retire in 2 years has nothing to do with how to invest your money. You need to focus on creating income over your lifespan.
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3. You don’t need to budget in retirement. Retirees often forget to track their expenses once they retire. They tell themselves that since their income is fixed, it doesn’t matter if they track their spending or not. Nothing could be further from the truth. If you make this mistake you could find yourself in debt, lose your good credit score, and possibly need to rely on your children for financial support. When you retire, it becomes more important than ever to track your spending precisely because your income is fixed.
When you retire, you may not be able to do much to influence your income, and that’s why you have to watch your spending even more carefully. To make budgeting simple, try using a spreadsheet or a software program that tracks your spending for you.
Neal Frankle is a certified financial planner and runs Wealth Pilgrim, a personal finance blog that helps people make smart decisions about their money. As a start, he suggests that you strive to understand your credit score range.