7 minute read
Retirement.
It’s a word we all hear when growing up.
The gist we’re taught is to work for decades, save often, invest wisely, and budget well to enjoy our post-career days in peace and solitude.
Sounds simple enough, right?
Well, unfortunately, just because it’s simple doesn’t make it easy.
For instance, myths about retirement run rampant – whether it's old wives' tales or outdated concepts or new fads that won’t last.
Thus, distinguishing between these myths and realities is crucial.
And this makes having a financial advisor an important step in this retirement journey.
They’re armed with insights that help one devise and execute a comprehensive retirement strategy to materialize this retirement dream.
And such proactive planning and strategic decision-making from an early stage are imperative.
So, while there are many myths and misinformation out there about retirement – let’s break down what I believe are the top four to watch out for.
Retirement Myths: Beware Falling For These Four
Myth One: Delaying retirement savings until your 40s is acceptable
Some argue that individuals in their twenties or thirties are too distant from retirement to focus on saving money.
However, this belief is fundamentally flawed because establishing a savings habit early on is critical for achieving a comfortable retirement.
Why?
Well, because of the power of compounding interest.
· Compound interest is when you earn interest on the money you've saved and further on the interest you earn along the way. Thus, each dollar and interest earned yields higher and higher interest.
Put simply, by stashing funds in vehicles such as high-yield savings accounts, one not only earns interest on the initial deposit but also on the accrued interest over time. And as the money remains untouched, the interest compounds, gradually growing the account balance.
The beauty lies in the longevity of the investment.
Beginning to save at 25 rather than 35 affords an additional decade for compounding to work its magic - potentially resulting in substantial wealth accumulation. Because once those precious years are gone, they cannot be reclaimed.
No wonder why Albert Einstein allegedly said1 that, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.”
Thus, contrary to popular notions, early initiation of retirement savings is indispensable for financial security in later years.
Myth Two: Government programs like Social Security and Medicare will be enough for retirement needs
There's a common misconception that government programs like Social Security and Medicare will fully cover retirement expenses.
However, while Social Security offers monthly payouts based on lifetime work and contributions, the maximum benefit isn't enough for most retirees, especially considering unexpected medical costs.
Meanwhile, Medicare covers some medical insurance for seniors, but it doesn't cover all expenses, such as long-term care services.
Relying solely on these programs without additional financial planning can leave retirees vulnerable to financial strain in their later years.
For example, a 2020 report2 from the National Institute on Retirement Security (NIRS) highlighted some troubling points – specifically that 40% of Older Americans rely solely on social security for retirement income.
Whether it was from poor retirement planning or bad luck later in life, this serves as a warning that social security and Medicare won’t be enough to solidify retirement.
Thus - while the government may mean well with these programs - it certainly doesn’t mean they are the "end-all-be-all” for retirement planning and may cause moral hazard – i.e. individuals expect government programs as a buffer, so they don’t plan for retirement correctly.
At times like this, I am reminded of Ronald Reagan’s wise words2, “I think you all know that I've always felt the nine most terrifying words in the English language are: I'm from the Government, and I'm here to help.”
Myth Three: The stock market is too risky for retirement savings
For many individuals, the idea of investing in the stock market can evoke fear.
The worry of a sudden market decline wrecking hard-earned savings isn’t exactly a comforting thought – especially as retirement nears or just begins.
And while it’s a justifiable worry – one that we’ve written about recently (read our piece on ‘sequence risk’ here3) – it doesn’t mean completely avoiding the market.
In previous generations, a retirement portfolio primarily consisting of bonds and CDs (bank time deposits) made sense due to shorter life expectancies and low inflation.
However, today's retirees confront a different reality.
Traditionally, retirees aimed to safeguard capital for a 10-15-year span, avoiding risks as there was limited time for recovery. Yet, today's retirees contend with longer horizons exceeding 30 years and inflation-eroding purchasing power. Thus, a no-risk portfolio may paradoxically pose the greatest risk.
· For example, with an inflation rate of 4%, your purchasing power diminishes by half every 18 years, necessitating a doubling of funds just to break even. Meaning that the failure to double your money implies your nest egg effectively depreciates by half every two decades (picture experiencing this erosion twice throughout your retirement).
Thus, today's retirees must adhere to a clear rule: safeguarding capital alone isn’t enough, they need growth to uphold purchasing power. And this is why the stock market is important.
In fact, avoiding the stock market can be a significant error for retirement planners - particularly those in their younger years.
Throughout one's career, the market will inevitably undergo various cycles, with periods of greed and fear. And while market fluctuations may tempt investors to withdraw funds during downturns (which is how most react), what truly matters is the long-term trajectory.
And historical data4 consistently demonstrates the market's overall upward trend over time – especially with compounding dividend growth.
While approaching retirement age may warrant a shift towards more conservative investments (such as scaling back equities in your portfolio relative to bonds), the early years of your life allow for more speculation (an increased weighting in stocks) - allowing investors to potentially capitalize on overall growth opportunities and dividends (which also compound).
Myth Four: You Don’t Need A Financial Advisor And Estate Planning Is Only For The Wealthy
Who needs help with retirement planning, right?
Well, truth be told, retirement planning is a bit of a maze.
There are so many moving pieces, and unless you've got endless time and expertise, it's easy to feel lost in the shuffle.
That's where a financial advisor comes in. They’ll sit down with you, build a tailored plan just for you, and then help you put it into action.
Now, don't just settle for any advisor. Take the time to find someone who clicks with you and your unique situation. It’s worth it to have the person by your side as you navigate all the retirement planning issues.
Meanwhile, many believe that estate planning Is only for the wealthy.
But that’s not true.
Regardless of your financial status, estate planning is crucial for directing your assets according to your desires in the future.
For example, things like creating a plan for:
· Asset Protection
· Tax Efficiency and Optimization Strategies
· Tax Optimization Strategies
· End-of-Life Wishes
All these steps can help protect wealth and increase peace of mind.
Thus, don’t ignore having a proper estate plan because you don’t believe you’re wealthy enough.
Because a solid plan is always a good thing to have.
Wrapping it Up
Navigating through the landscape of retirement planning requires understanding the difference between common myths and informed strategies.
Thus, with a solid understanding of the realities and the support of knowledgeable advisors, individuals can confidently navigate the complexities of retirement planning, aid in their financial well-being, and secure a fulfilling future for themselves and their loved ones.
If you need any help with the above or wish to learn more, please click here or call us at (858) 964 – 0500 to see how we can help.
Sources:
1. https://www.clearwealthasset.com/einsteins-8th-wonder-of-the-world/
2. https://www.reaganfoundation.org/ronald-reagan/reagan-quotes-speeches/news-conference-1/
3. https://www.dunham.com/FA/Blog/Posts/sequence-risk-for-retirees
4. https://www.schwab.com/learn/story/power-dividend-reinvestment
Disclosure:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax, or investment advice or an investment recommendation, or as a substitute for legal counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy, or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice
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