Debunking misconceptions on taxes, Social Security, and beyond
Retirement is a long-awaited milestone, but outdated assumptions can lead to costly surprises. From taxes and Social Security to healthcare and investment strategies, here are 10 common myths to watch out for and what to do instead.
Myth 1: You’ll pay less in taxes in retirement
Reality: Many retirees are surprised to find their tax bill doesn’t shrink—especially when Required Minimum Distributions (RMDs), Social Security, and Medicare surcharges are factored in. Incorporating a mix of tax-deferred, tax-free, and taxable accounts in your savings plan can provide more control over how and when you’re taxed.
Tip: Review your expected income sources before retirement to understand how they’ll be taxed and explore how blending Roth, taxable, and traditional accounts can create flexibility.
Myth 2: Retirement expenses will naturally decline
Reality: While some expenses may drop, others—especially healthcare and travel—often fluctuate greatly during retirement. Plus, Required Minimum Distributions (RMDs) can force withdrawals you don’t really need, creating unexpected tax burdens. Proper planning can help ensure your withdrawals reflect your needs—not just IRS rules. A realistic spending plan should also reflect the lifestyle you want to live and account for unpredictable medical or long-term care costs.
Myth 3: Social Security benefits aren’t taxable
Reality: Up to 85% of your Social Security benefits may be taxed depending on your income. This is especially common if you have investment income or RMDs. Managing withdrawals carefully can reduce the impact.
Myth 4: Everyone should claim Social Security at Full Retirement Age
Reality: There’s no one-size-fits-all answer. While claiming at Full Retirement Age (FRA) works for many, others may benefit from claiming earlier or delaying up to age 70 to boost lifetime benefits. Your health, portfolio needs, and tax exposure should all be considered. If you are married, strategizing between you and your spouse may allow you to maximize your benefits received.
Tip: Consider modeling different Social Security claim ages to see how each option impacts your lifetime benefits and taxes, especially in relation to other income sources.
Myth 5: You should always stay in the lowest possible tax bracket
Reality: It might seem intuitive to minimize taxes each year, but over the course of retirement, this approach could lead to higher taxes later. Strategic withdrawals, especially in low-income years, can help manage long-term tax exposure. Smart tax planning should span years, not just a single tax season.
Myth 6: Your portfolio should get ultra-conservative in retirement
Reality: While in many situations it’s important to reduce risk, going too conservative too soon can limit growth and expose you to inflation and longevity risks. A well-diversified portfolio, with the right balance of growth and safety, can help sustain your income over a 20- to 30-year retirement.
Myth 7: You can keep working for as long as you want
Reality: Many people plan to work longer, but health issues, caregiving responsibilities, or job loss can derail those plans. It’s wise to build a plan that doesn’t rely solely on working into your 70s in case you’re forced to retire earlier than expected.
Myth 8: Your withdrawal rate is set in stone
Reality: The traditional “4% rule” is a fine starting point, not a fixed rule. Spending often fluctuates due to health, lifestyle, and market performance. A rigid withdrawal approach can limit your flexibility and may increase the risk of depleting assets too soon or leaving your goals unaccomplished. Instead, build flexibility by reviewing your plan regularly and adjusting as needed.
Tip: Review your withdrawal strategy annually to adapt to changes in the market, your lifestyle, or health. Flexibility is often more valuable than precision.
Myth 9: Medicare will cover all health care costs
Reality: Medicare covers many expenses—but not everything. Expect to budget for premiums, copays, supplemental insurance, and long-term care, which is not covered. A coordinated health care and income strategy can help you manage these costs and avoid surprises.
Tip: Start planning for potential long-term care expenses early, even if you don’t anticipate needing care soon. Consider hybrid insurance options or setting aside a health care reserve.
Myth 10: Roth conversions are the only tax strategy that matters
Reality: While Roth conversions are a powerful tool, they aren’t the only one. A comprehensive tax-efficient withdrawal strategy looks at your full financial picture—timing, income needs, Medicare considerations, and more.
Tip: Explore withdrawal strategies with both your advisor and tax professional to ensure your tax planning supports your overall retirement goals.
Not a Myth: A plan makes all the difference
Debunking these myths is the first step. The next? Work with a trusted advisor—like the team at First Community Trust (FCT)—to build a retirement strategy that’s tax-aware, personalized, and ready to adapt as life evolves. A strong plan keeps you steady and on track, no matter what comes.