Retirement planning is easier when you have a clear understanding of the facts. First and foremost, grasp this essential truth: Retirees require a steady stream of income to live comfortably. Next, understand that the income can come from a variety of sources, including your savings account, investments in retirement accounts, stock market investments, pensions, annuities and social security.
There’s a lot of bad information and fear about saving for retirement. In fact, a majority of Americans say they’re afraid they won’t have enough money to retire at all. They state keeping up with the cost of living and managing debt as top concerns. So, do your research now to alleviate the worry.
Don’t let these 4 common misconceptions lead you astray as you plan for your golden years.
Myth 1: You can’t contribute to an IRA if you have a retirement plan at work.
Reality: Investing strategically in retirement accounts with different tax treatments can be a smart move. That strategy may help you manage your taxes and have more retirement income. Having an employer-sponsored retirement plan doesn’t stop you from opening and contributing to a Traditional IRA or Roth IRA. Both types of IRA accounts have tax benefits that could potentially boost your nest egg.
One benefit to a Traditional IRA is that contributions may be deductible on your federal tax return. However, your deduction may be limited if you or your spouse are covered by a retirement plan at work and if your income exceeds certain levels. Take a look at how different circumstances could affect what your deduction would be for 2022, according to the Internal Revenue Service (IRS):
- $68,000 or less, then you can take a full deduction up to the amount of your contribution limit
- more than $68,000 but less than $78,000, then you can take a partial deduction
- $78,000 or more, then you’re not eligible for a deduction
- $109,000 or less, then you can take a full deduction up to the amount of your contribution limit
- more than $109,000 but less than $129,000, then you can take a partial deduction
- $129,000 or more, then you’re not eligible for a deduction
- $204,000 or less, then you can take a full deduction up to the amount of your contribution limit
- more than $204,000 but less than $214,000, then you can take a partial deduction
- $214,000 or more, then you’re not eligible for a deduction
Roth IRA contributions aren’t deductible. Therefore, being covered by a retirement plan at work has no effect on your contributions.
Myth 2: There’s no hope of accessing your money before retirement when you contribute to a retirement plan.
Reality: If at all possible, it’s best to leave retirement funds untouched until you retire. But if you do need access to your funds before then, most employer-sponsored retirement plans will allow you to take a loan and/or make a hardship withdrawal to pay for things like medical expenses or college tuition for you, your spouse or a dependent. Just be aware that you may have to pay taxes and penalties on earnings withdrawn, unless an early withdrawal exception applies. For instance, a hardship withdrawal from a 401(k) plan before age 59½, allowed by many employers, may be subject to a 10% tax on top of your normal tax rate on previously untaxed dollars.
Likewise, if you have an IRA outside of your workplace, early withdrawals typically incur a 10% penalty. This is meant to encourage you to leave the money alone until retirement. Certain circumstances do allow for penalty-free IRA withdrawals. Examples include paying for a child’s college tuition or for unreimbursed medical expenses. You may still owe federal and state taxes on the withdrawn funds.
A tax advisor can help you figure out what’s right for you. Bottom line: There are indeed ways that you can access your retirement plan accounts before retirement.
Myth 3: Medicare will cover all my health care expenses.
Reality: Medicare covers some health care costs but not all medical expenses for those ages 65 and older. One 2021 poll by the Kaiser Family Foundation found that more than three-fourths of adults who need more help with daily care, like bathing and managing medicine, cite “not being able to afford the cost of the care” as a reason they or their family member lack the support from paid nurses or aides.
The Employee Benefit Research Institute estimated that in 2020, a 65-year-old man would have needed $130,000 and a 65-year-old woman would have needed $146,000 to each have a 90% chance of being able to cover health care expenses throughout their retirement years. This data doesn’t include savings that may be needed to cover long-term care expenses. With the average U.S. life expectancy at 77.3, according to 2020 data from the Centers for Disease Control and Prevention, you’ll have years of health care costs to plan for. So don’t rely on Medicare alone.
Myth 4: Since my child will attend college before I retire, I should save for college costs before retirement.
Reality: An example from everyday life might explain why you should put retirement savings before your child’s college tuition. When you’re on an airplane, the flight attendant tells you that in case of loss of cabin pressure, you should secure your own oxygen mask before assisting your child. The reason: You’ll be no good to your child if you pass out. The same principle applies here. If you don’t save for your own retirement, you may become a financial burden on your child in your later years. So, take care of yourself first by building your retirement savings. At the same time, there are many ways to finance an education for your child.
If you’d like more information about retirement planning, reach out to Navy Federal Investment Services. Advisors are available in more than 150 Navy Federal Credit Union Branches. Find an advisor near you or call 877-221-8108 to set up an appointment.
This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.