The 1 Myth That Could Seriously Destroy Your Retirement

Key Points

• It's easy to assume that all of your living expenses will decrease in retirement.

• Many could stay the same, and some might go up.

• Make sure you understand what retirement will cost you, and that you have enough income to maintain a comfortable lifestyle.

• The $23,760 Social Security bonus most retirees completely overlook ›

When you're in the process of planning for retirement, as opposed to being in the thick of it, it's easy to make certain assumptions. You might, for example, assume that your days will be yours to enjoy as you please. In reality, you may find that family obligations and healthcare appointments keep you busier than expected.

You might also assume that once you get to retirement, all of your living costs are going to shrink. But it's that misconception that could leave you in a serious bind once your career comes to an end.

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Don't assume your spending will decline drastically

Many people assume that they'll be able to get by on a lot less income once they retire. But while you may not need 100% of your former salary to cover your retirement expenses, you could easily end up needing the bulk of it.

Certain expenses of yours are likely to shrink in retirement. If you pay off your home before ending your career, you won't have to make a monthly mortgage payment. And if you're not working, whatever money you used to spend getting to and from your job is money you won't have to shell out once you've resigned for good.

But a lot of your expenses could easily stay the same in retirement. The cable TV you pay for won't cost less just because you're watching more of it due to having free time. And the cost of heating and cooling your home won't decline. If anything, it might increase, since you'll be home more often and will need a comfortable indoor environment during those hours you used to spend at the office.

Other costs of yours might increase, too. You might spend more on entertainment due to having more free hours in the day. You might spend more on healthcare if your Medicare plan doesn't offer the same level of coverage as your former employer's insurance.

That's why you can't assume that your spending in retirement will decrease drastically. It may decrease modestly. But as a general rule, you still want to have about 70% to 80% of your former annual income available to you. Otherwise, you might have to make lifestyle changes you aren't a fan of.

How to avoid a retirement income shortfall

Hopefully, by now you're convinced that you may end up needing to replace the majority of your paycheck once you retire. To that end, you should know that if you're an average earner, Social Security will replace about 40% of your wages. And that assumes that benefits aren't cut.

Clearly, you'll need to make up a big gap if you're aiming for 70% to 80% of your former pay. To that end, do your best to fund an IRA or 401(k) plan during your working years. And also, invest the money in your retirement account so it grows into a larger sum over time.

You should also try to set yourself up with investments that continue to provide you with income in retirement. Those could include dividend stocks, bonds, and real estate investment trusts.

It's easy to assume that you'll spend considerably less in retirement. But that may not end up being the case at all. The sooner you realize that, the sooner you can begin saving and investing so you don't end up short on money later in life.

The $23,760 Social Security bonus most retirees completely overlook

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