You need money to create a financial plan. Social Security is going bankrupt. You should always follow the 4% rule when saving for retirement.
These and other common financial planning myths are widely held, but they don’t always stand up to scrutiny. Sure the 4% rule may work for some people, but it’s not the only option. Yes, Social Security is struggling but it’s not on the verge of collapse.
It’s easy to get caught up in retirement financial planning myths, but doing so can be costly if it affects how you save, invest and plan for the future.
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Take, for example, the person who thinks they don’t have enough money to meet with a financial advisor. They could miss out on guidance that could help them better prepare for retirement.
With so many misconceptions floating around, we’ve identified the most common ones and debunked them for you.
7 Financial Planning Myths Debunked
Myth 1: Everyone should follow the 4% rule
The 4% rule has been around since the mid-90s and is a popular retirement savings strategy, even today. It suggests retirees can withdraw 4% of their total retirement savings every year, adjusting for inflation, and their retirement dollars should last roughly 30 years.
Proponents like it because it’s a simple rule and provides retirees with a consistent and predictable stream of income in retirement.
The truth: The 4% rule is more of a guideline than a hard-and-fast rule. It doesn’t account for an individual’s unique circumstances, market fluctuations or personal spending habits.
Why it’s wrong: Critics argue it’s too rigid, ignoring factors like taxes, fees and the potential financial impact of unexpected expenses, such as long-term care.
“The biggest myth is that you should follow it. It's a rule of thumb if you want a rough gauge," says Sharon Carson, executive director of J.P. Morgan Asset Management. “If you blindly follow, it in most cases you end up with a lot more money. Great if your legacy was your goal, but you could have a better lifestyle having more flexibility.”
To get a more accurate idea of what your spending needs are in retirement, Carson suggests using one of the many free retirement planning calculators available online or to seek help from a financial advisor. Either option will give you a customized plan, taking into account your unique financial situation.
Myth 2: Social Security is bankrupt
Many Americans rely on Social Security to supplement their income and many, two-thirds in one survey, think Social Security is going to run out of money. They may not think it will run out of money today, but in their lifetime.
The truth: According to the Social Security Administration the program is fully funded through 2035. After that, if no changes are made to secure more revenue, retirees will receive about 83% of their benefits. To make up the shortfall, the SSA will need to increase revenue and/or trim benefits.
Why it's wrong: The fear that Social Security is going bankrupt may push some people on the verge of retirement to start collecting benefits early. But doing so would result in a reduction of up to 30% in their monthly payments.
“While changes will need to be made to ensure its long-term viability, we believe Social Security will likely remain an important part of an individual's retirement income strategy,” says Katherine Tierney, senior retirement strategist at Edward Jones.
“And, while you can’t control what, if anything, will change with Social Security, you are in control of some key aspects of your retirement strategy, including when you begin to claim Social Security benefits and how much you personally save for retirement.”
Myth 3: Cash is king
In times of uncertainty, many people liquidate their holdings and move to cash. They may be putting it in CDs, bonds or even gold. They are betting it’s safer than being beholden to the whims of the stock market.
The truth: It's ok to have a portion of your portfolio in cash but not all of it. Retirement can last 30+ years, which means your assets need to continue to grow. How are you going to do that if it’s stashed under the mattress?
Why it’s wrong: A portfolio of all cash and bonds won’t be able to keep up with inflation over a thirty-year retirement or with rising healthcare costs. It’s better to have money spread out in stocks, cash and bonds.
“When it comes to saving for retirement, the biggest risk you face is not in the stock market – it's not reaching your retirement goal,” says Tierney. “Having too much in cash can prevent you from reaching your long-term goals.”
Myth 4: Long-term care insurance or nothing
Nobody wants to be a burden in old age, so they turn to insurance for protection, thinking it's the only option. It makes sense, long-term care is expensive and footing the bill outright is a non-starter for lots of people.
The truth: While insurance may be an option to cover some of your long-term care costs, annuities, home equity loans, the sale of your house and tapping savings are alternatives. Be open and flexible when deciding how to pay for long-term care.
“It could have been that you had a big travel budget for most of your retirement and now you need long term care but you don’t need a travel budget,” says J.P. Morgan’s Carson. “Or you might be able to use your house you got paid off to afford assisted living. There’s no one silver bullet.”
Why it’s wrong: Long-term care insurance is expensive and depending on how many years you require care you may need a lot of coverage.
According to an American Association for Long Term Care Insurance study, a single male aged 60 pays an annual premium of $1,175 for $165,000 in benefits, while a female pays $1,900. That would get you a year-and-a-half of coverage. Add inflation protection of 2% to the mix and the premiums increase to $2,000 for a male and $3,300 for a female. The more inflation protection, the costlier it is.
Myth 5: Financial plans are for rich people
Whether you’re saving for a home or retirement, a financial plan is the blueprint to get you there. Nonetheless, many Americans don’t have a will, let alone a financial plan.
A recent Charles Schwab Modern Wealth survey demonstrates that. Only 36% of Americans have a written financial plan, according to Schwab’s report.
The truth: Anybody can benefit from a financial plan, whether they do it on their own or hire a financial advisor.
A fee-only financial advisor gets paid for his or her advice. Rates range from $200 to $400 an hour and one-time plans range from $1,000 to $3,000, according to NerdWallet.
“A financial plan can help you build wealth by defining your goals and identifying appropriate steps you can take to help achieve them,” says Tierney.
Why it’s wrong: Without a plan you could end up making costly mistakes, reacting emotionally to movements in the market and paying more in fees and taxes than you have to.
Myth 6: Estate planning doesn’t apply to me
Estate planning, including drafting a will, is one of those things people put on the backburner. They figure they have years to worry about that or their assets aren’t complicated enough to need one.
For others, it’s an expense they can’t afford. At last check, only 24% of adults in America have a will, according to Caring.com.
The truth: We all hope to live a long and healthy life but sadly the unexpected can happen, which is why you need to make a will, even if you have limited assets. Your will can include jewelry, antiques or items that have sentimental value.
You can DIY your will for free, pay between $10 and $250 for an online service, or hire an attorney for anywhere from $300 to $1,000 on average, according to LegalZoom.
“Many people’s default position is that there’s no need to take action or plan because they don’t think their finances have much complexity,” says Jeremiah Barlow, executive vice president and head of wealth solutions for Mercer Advisors.
Why it’s wrong: If you die without a will, the courts make all the decisions about your property and assets. Probate proceedings can get hung up for years, depriving your heirs of the assets you intended for them.
Myth 7: I can set my financial plan and forget it
A common mindset among investors and savers is that once they create a financial plan they’re done. They think if they set it and forget it, it will automatically go up, not taking into account the impact of life circumstances.
The truth: Life is dynamic and what worked when you created your financial plan may not work today. You may get married, have a baby or get a raise, all of which impacts your finances, goals and plan.
Financial plans should be subject to a regular review, particularly when things in your life change.
Why it's wrong: If you set it and forget it, your portfolio may veer off course.
“Your life circumstances change, tax laws are regularly updated, investment maximums and minimums change over time, investment options change and even your own tax brackets adjust over time,” says Barlow. “A good financial plan is a marvelous living and breathing thing that needs to evolve over time.”
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