Editor’s be aware: That is half 4 of a four-part sequence exploring monetary reality vs fiction. Every article examines 5 of the highest 20 commonest monetary myths — from investments to retirement and Social Safety to life insurance coverage. Components one, two and three — This Roth Conversion Fantasy May Price You, Why Your ‘Magic Quantity’ Is not Really Magical and Why Inflation Is Decrease, However Costs Are Not — lined the primary 15.
We have come to the fourth and last installment of our deep dive into the highest 20 commonest monetary myths.
All through this sequence, we have examined all kinds of matters, from inventory and bond efficiency to retirement readiness, life insurance coverage, Social Safety, revenue taxes and extra.
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Listed here are myths 16-20, together with the information:
16. Social Safety and Medicare are ‘entitlements’ funded by the federal government (i.e. taxpayers)
Most individuals consider an entitlement as one thing they get without spending a dime, no matter whether or not they work for a dwelling.
However American employees pay into Social Safety and Medicare their whole working lives (should you’re self-employed, you are paying twice as a lot), so these packages aren’t freebies.
Nonetheless, it is necessary to do not forget that Social Safety is not an revenue alternative. These on the decrease finish of the spectrum would possibly obtain about 65% to 80% of their earned revenue.
Larger-income earners will get loads much less, as a share, since Social Safety advantages plateau at $61,000 per 12 months for 2025.
Finally, Social Safety and Medicare are essential advantages however ought to ideally work alongside your different investments (company-sponsored 401(okay), particular person retirement account and self-directed accounts) to give you revenue in retirement.
17. Since life insurance coverage payouts are revenue tax-free to my heirs, I will not owe property taxes on these payouts
When somebody with life insurance coverage dies, their beneficiaries obtain the coverage’s face worth as a tax-free profit.
However when their partner or little one prepares the decedent’s last tax return, the property would possibly owe state or federal property taxes, relying on how giant the property is.
Whereas life insurance coverage involves you revenue tax-free, bear in mind there are several types of taxes, and the decedent’s property might nonetheless be taxed.
For those who’re rich, it is best to contemplate taking additional steps to guard your property. You are able to do this by transferring your life insurance coverage coverage into an irrevocable life insurance coverage belief (ILIT), during which your beneficiaries, not the decedent, personal the belief, so life insurance coverage proceeds usually are not a part of the decedent’s taxable property.
One other comparable possibility for married {couples} is to open a spousal lifetime asset belief (SLAT), which permits the decedent’s partner to dwell off the revenue produced by the belief whereas the asset itself stays within the SLAT and is exempt from property tax liabilities.
18. Reverse mortgages are ‘unhealthy’ and make no monetary sense for owners
As a monetary planner, I reject the notion that anyone monetary technique is inherently “good” or “unhealthy.” I contemplate every consumer’s particular state of affairs and advocate a plan that’s proper for them.
Whereas reverse mortgages have gotten a foul rap for years, they are often an efficient device for a selected sort of consumer: people who find themselves income-poor however asset-rich.
Guidelines and rules round reverse mortgages and, particularly, HECMs (residence fairness conversion mortgages) have been up to date to guard in opposition to a lot of the issues incurred by shoppers many years in the past.
A number of years in the past, I labored with a retired lady who lived in a completely paid off home in a rich neighborhood, however had no revenue outdoors of Social Safety.
She wanted further revenue, wished to remain in her residence, was estranged from her kids and deliberate to depart her property to charity. This could possibly be an ideal state of affairs for taking out a reverse mortgage.
Whenever you get hold of a reverse mortgage, you are changing residence fairness into an revenue stream. The financial institution or mortgage supplier determines the utmost dimension of your mortgage primarily based on age, rate of interest and fairness.
Sadly, in a high-interest fee atmosphere, you’ll be able to burn by way of your fairness shortly, so debtors ought to consider carefully concerning the potential impression it may well have on beneficiaries.
Usually, purchasers produce other belongings to promote or borrow in opposition to for revenue, so reverse mortgages aren’t one thing I usually advocate, although they are often very efficient when used strategically.
19. Since I raised our youngsters and by no means paid into Social Safety, I will not be eligible for Social Safety advantages
For those who’re a nonworking partner, you’ll be able to entry as much as 50% of your working partner’s Social Safety profit whereas they’re alive, which means that, for instance, a lady whose husband qualifies for $4,000 in advantages will qualify for as much as $2,000 of her personal advantages.
In a case during which the husband dies first, she would then qualify for the survivor profit on the larger quantity, $4,000.
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Moreover, a divorced partner can qualify for a portion of their former partner’s profit in the event that they have been married for 10-plus years and have not subsequently remarried.
Your spousal profit will not impression your ex-spouse’s personal profit; they will not even know you are receiving it.
20. Accountable monetary planning dictates that people ought to carry life insurance coverage all through their lifetimes
Folks usually assume they should carry life insurance coverage all through their lives, however that is mistaken. As a monetary planner, I have a look at life insurance coverage primarily as a alternative for revenue when somebody is of their working years and has others who rely on their wage (e.g., partner, kids).
If a pair has had a profitable working life, made cash and invested it well, there is perhaps no want for all times insurance coverage, as a result of there is no such thing as a revenue to guard after they retire.
There are different causes to hold life insurance coverage. Rich individuals who personal companies or actual property usually take out life insurance coverage for liquidity at their passing.
For instance, I used to work with a farmer within the Midwest who owned 1,000 acres of farmland valued at about $10 million; he had no different belongings.
By taking out life insurance coverage, he can present his household with money to pay any taxes owed on his property, avoiding a possible hearth sale and permitting his heirs to (probably) proceed farming the household’s land.
Past property taxes, some individuals take out insurance policies for philanthropic pursuits, to depart a legacy or set up a scholarship or basis, nevertheless it’s pointless to take action from a pure income-replacement standpoint.
Data is energy. Now that we have gone by way of the total record of 20 monetary myths, you’ll be able to set the document straight when a buddy or relative makes a simplistic or incorrect assertion corresponding to “Social Safety goes bankrupt,” or “investing within the S&P 500 means you are broadly diversified.”
Monetary planning is complicated and never conducive to black-and-white solutions. That is why it is necessary to talk with a educated skilled who can information you thru the method and devise methods which can be best for you, your loved ones and your distinctive circumstances.
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This text was written by and presents the views of our contributing adviser, not the Kiplinger editorial workers. You may test adviser data with the SEC or with FINRA.
