Editor’s note: This is part four of a four-part series exploring financial fact vs fiction. Each article examines five of the top 20 most common financial myths — from investments to retirement and Social Security to life insurance. Parts one, two and three — This Roth Conversion Myth Could Cost You, Why Your ‘Magic Number’ Isn’t Actually Magical and Why Inflation Is Lower, But Prices Are Not — covered the first 15.
We’ve come to the fourth and final installment of our deep dive into the top 20 most common financial myths.
Throughout this series, we’ve examined a wide variety of topics, from stock and bond performance to retirement readiness, life insurance, Social Security, income taxes and more.
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Here are myths 16-20, along with the facts:
16. Social Security and Medicare are ‘entitlements’ funded by the government (i.e. taxpayers)
Most people think of an entitlement as something they get for free, regardless of whether they work for a living.
But American workers pay into Social Security and Medicare their entire working lives (if you’re self-employed, you’re paying twice as much), so these programs aren’t freebies.
However, it’s important to remember that Social Security isn’t an income replacement. Those on the lower end of the spectrum might receive about 65% to 80% of their earned income.
Higher-income earners will get a lot less, as a percentage, since Social Security benefits plateau at $61,000 per year for 2025.
Ultimately, Social Security and Medicare are crucial benefits but should ideally work alongside your other investments (company-sponsored 401(k), individual retirement account and self-directed accounts) to provide you with income in retirement.
17. Since life insurance payouts are income tax-free to my heirs, I won’t owe estate taxes on these payouts
When someone with life insurance dies, their beneficiaries receive the policy’s face value as a tax-free benefit.
But when their spouse or child prepares the decedent’s final tax return, the estate might owe state or federal estate taxes, depending on how large the estate is.
While life insurance comes to you income tax-free, remember there are different types of taxes, and the decedent’s estate could still be taxed.
If you’re wealthy, you should consider taking extra steps to protect your estate. You can do this by transferring your life insurance policy into an irrevocable life insurance trust (ILIT), in which your beneficiaries, not the decedent, own the trust, so life insurance proceeds are not part of the decedent’s taxable estate.
Another similar option for married couples is to open a spousal lifetime asset trust (SLAT), which allows the decedent’s spouse to live off the income produced by the trust while the asset itself remains in the SLAT and is exempt from estate tax liabilities.
18. Reverse mortgages are ‘bad’ and make no financial sense for homeowners
As a financial planner, I reject the notion that any one financial strategy is inherently “good” or “bad.” I consider each client’s specific situation and recommend a plan that is right for them.
Rules and regulations around reverse mortgages and, specifically, HECMs (home equity conversion mortgages) have been updated to protect against most of the problems incurred by consumers decades ago.
Several years ago, I worked with a retired woman who lived in a fully paid off house in a wealthy neighborhood, but had no income outside of Social Security.
She needed additional income, wanted to stay in her home, was estranged from her children and planned to leave her estate to charity. This could be a perfect scenario for taking out a reverse mortgage.
When you obtain a reverse mortgage, you’re converting home equity into an income stream. The bank or mortgage provider determines the maximum size of your loan based on age, interest rate and equity.
Unfortunately, in a high-interest rate environment, you can burn through your equity quickly, so borrowers should think carefully about the potential impact it can have on beneficiaries.
Typically, clients have other assets to sell or borrow against for income, so reverse mortgages aren’t something I normally recommend, though they can be very effective when used strategically.
19. Since I raised our children and never paid into Social Security, I won’t be eligible for Social Security benefits
In a case in which the husband dies first, she would then qualify for the survivor benefit at the higher amount, $4,000.
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Additionally, a divorced spouse can qualify for a portion of their former spouse’s benefit if they were married for 10-plus years and haven’t subsequently remarried.
Your spousal benefit won’t impact your ex-spouse’s own benefit; they won’t even know you’re receiving it.
20. Responsible financial planning dictates that individuals should carry life insurance throughout their lifetimes
People often think they need to carry life insurance throughout their lives, but that’s wrong. As a financial planner, I look at life insurance primarily as a replacement for income when someone is in their working years and has others who depend on their salary (e.g., spouse, children).
If a couple has had a successful working life, made money and invested it smartly, there might be no need for life insurance, because there is no income to protect after they retire.
There are other reasons to carry life insurance. Wealthy people who own businesses or real estate often take out life insurance for liquidity at their passing.
For example, I used to work with a farmer in the Midwest who owned 1,000 acres of farmland valued at about $10 million; he had no other assets.
By taking out life insurance, he can provide his family with cash to pay any taxes owed on his estate, avoiding a potential fire sale and allowing his heirs to (potentially) continue farming the family’s land.
Beyond estate taxes, some people take out policies for philanthropic pursuits, to leave a legacy or establish a scholarship or foundation, but it’s unnecessary to do so from a pure income-replacement standpoint.
Knowledge is power. Now that we’ve gone through the full list of 20 financial myths, you can set the record straight when a friend or relative makes a simplistic or incorrect statement such as “Social Security is going bankrupt,” or “investing in the S&P 500 means you’re broadly diversified.”
Financial planning is complex and not conducive to black-and-white answers. That’s why it’s important to speak with a knowledgeable professional who can guide you through the process and devise strategies that are right for you, your family and your unique circumstances.
