5 Common Myths about Retirement Planning

No matter your age, if you want to build wealth for the future, it’s important to develop healthy wealth habits today–and the sooner you start, the more likely you are to set yourself up for success. One key concept to understand for your investment journey is the power of compounding interest, which can make your money work harder for you over time and thus help you reach your financial goals faster.

To understand compounding, let’s start with the concept of interest. When you deposit money into a savings account or invest it in the stock market, it has the potential to grow. For example, if you save $10,000 in a bank with a 5% interest rate at the start of the year, you should earn $500 in interest by the end of the first year for a total of $10,500.

In turn, compound interest is the interest you earn on the principal and all previously accumulated interest. So, if you keep your savings in that same account for another year, you should earn $525 in interest (i.e., 5% on the new balance of $10,500) by the end of the second year for a total of $11,025. Over six years, your original investment of $10,000 could be more than $13,000. That’s the power of compounding. Now, imagine how compounding might help your money grow over time if you invested in assets with higher return potential, such as stocks, using a tax-advantaged 401(k) and/or IRA, both far more common vehicles for building a retirement nest egg.

Unfortunately, life can be unpredictable, and it’s hard to know now what your circumstances will be when the time to retire comes around. For example, you may need to retire earlier than you expected due to illness or burnout. You could decide at some point in your career to step away to care for loved ones, which could reduce the amount you had planned to save for retirement. Once you retire, you may want to have options such as traveling or moving to live closer to your grandchildren. By starting to save and invest early, you help build the financial cushion needed to give your future self greater flexibility to adjust life plans as your needs and preferences change. 

The truth is, money is emotional and many people experience financial anxiety. One example of how emotions can affect investment choices is panic-selling in volatile markets and keeping your money on the sidelines as you wait for markets to rebound. Unfortunately, when this happens, you not only lock in your losses but may also find it hard to know when to get back into the market, potentially missing opportunities for your portfolio to recover.

That begs the question: How do you make a good decision despite natural feelings of worry, excitement, concern or being overwhelmed? Having a financial plan can help you make better, more rational decisions in the face of some very emotional decisions and life milestones. People with financial plans tend to have significantly reduced financial stress and feel more confident in the financial decisions they’re making.

Social Security can be an important part of planning your income in retirement, but it’s likely not going to be your only source of income. Instead, it’s helpful to think of retirement income as a team sport because you’ll want multiple sources to help get you to your goal—not just Social Security, but also your 401(k), individual retirement accounts (IRAs) and your taxable portfolio, just to name a few.

In fact, it can be smart to wait on receiving Social Security payments. For example, you can begin collecting Social Security benefits as early as age 62—but if you do, you will likely receive substantially lower payments than if you wait until what’s known as “full retirement age” at 67. If you can wait even longer, you can further boost how much you will receive each month, up to age 70.

While Medicare—the federal health insurance program for people in the U.S. age 65 or older—does cover many healthcare costs, it will not cover everything. For example, it might not cover things like dental care, eye exams or hearing aids, which many people may need. Your personal savings, insurance and retirement accounts can work together to help balance out your medical costs and support a high quality of life when you’re older.