No matter how many years you are from retirement, it's essential to have some kind of game plan in place for financing it. With today's longer life expectancy, retirement can last 25 years or more, and counting on Social Security or a company pension to cover all your retirement income needs isn't a strategy you really want to rely on. As you put a plan together, watch out for these common myths.
Myth No. 1: I can postpone saving now and make it up later
Reality: This is very hard to do. If you wait until--fill in the blank--you buy a new car, the kids are in college, you've paid off your own student loans, your business is off the ground, or you've remodeled your kitchen, you might never have the money to save for retirement. Bottom line--at every stage of your life, there will be competing financial needs. Don't make the mistake of thinking it will be easier to save for retirement in just a few years. It won't.
Consider this: A 25 year old who saves $400 per month for retirement until age 65 in a tax-deferred account earning 4% a year would have $472,785 by age 65. By comparison, a 35 year old would have $277,620 by age 65, a 45 year old would have $146,710, and a 55 year old would have $58,900.
Note: This is a hypothetical example and is not intended to reflect the actual performance of any specific investment.
Why such a difference? Compounding. Compounding is the process by which earnings are reinvested back into a portfolio, and those earnings may themselves earn returns, then those returns may earn returns, and so on. The key is to allow enough time for compounding to go to work--thus the importance of starting to save early.
Now, is it likely that a 25 year old will be able to save for retirement month after month for 40 straight years? Probably not. There are times when saving for retirement will likely need to take a back seat--for example, if you're between jobs, at home caring for children, or amassing funds for a down payment on a home. However, by starting to save for retirement early, not only do you put yourself in the best possible position to take advantage of compounding, but you get into the retirement mindset, which hopefully makes you more likely to resume contributions as soon as you can.
Myth No. 2: A retirement target date fund puts me on investment autopilot
Reality: Not necessarily. Retirement target date mutual funds--funds that automatically adjust to a more conservative asset mix as you approach retirement and the fund's target date--are appealing to retirement investors because the fund assumes the job of reallocating the asset mix over time. But these funds can vary quite a bit. Even funds with the same target date can vary in their exposure to stocks.
If you decide to invest in a retirement target date fund, make sure you understand the fund's "glide path," which refers to how the asset allocation will change over time, including when it turns the most conservative. You should also compare fees among similar target date funds.
Myth No. 3: I should invest primarily in bonds rather than stocks as I get older
Reality: Not necessarily. A common guideline is to subtract your age from 100 to determine the percentage of stocks you should have in your portfolio, with the remainder in bonds and cash alternatives. But this strategy may need some updating for two reasons. One, with more retirements lasting 25 years or longer, your savings could be threatened by years of inflation. Though inflation is relatively low right now, it's possible that it may get worse in coming years, and historically, stocks have had a better chance than bonds of beating inflation over the long term (though keep in mind that past performance is no guarantee of future results). And two, because interest rates are bound to rise eventually, bond prices could be threatened since they tend to move in the opposite direction from interest rates.
Myth No. 4: I will need much less income in retirement
Reality: Maybe, but it might be a mistake to count on it. In fact, in the early years of retirement, you may find that you spend just as much money, or maybe more, than when you were working, especially if you are still paying a mortgage and possibly other loans like auto or college-related loans.
Even if you pay off your mortgage and other loans, you'll still be on the hook for utilities, property maintenance and insurance, property taxes, federal (and maybe state) income taxes, and other insurance costs, along with food, transportation, and miscellaneous personal items. Wild card expenses during retirement--meaning they can vary dramatically from person to person--include travel/leisure costs, health-care costs, financial help for adult children, and expenses related to grandchildren. Because spending habits in retirement can vary widely, it's a good idea as you approach retirement to analyze what expenses you expect to have when you retire.
Roy Larsen, CFP®, AAMS® is a CERTIFIED FINANCIAL PLANNER™ practitioner, financial advisor and wealth manager. Roy is President and CCO of Larsen Wealth Management, LLC, a Fee-Only Registered Investment Advisory firm in Cumming, Georgia. Roy is an expert in successful retirement living and specializes in holistically managing the multiple planning and investing issues surrounding the receipt of a large lump sum. Roy Larsen, CFP®, AAMS® is available in all 50 States. He can be reached for comment at 678-456-8138,firstname.lastname@example.org or www.investinretirement.net
There was a time not that long ago that when the subject of retirement came up, we all pretty much had the same vision of what it would look like. We would work to about age 65, retire and live comfortably on our company or union pension, social security and whatever savings we had in the bank. It was similar for everyone. Retirees would kick back on the sofa, visit grandkids, travel and do this for the rest of their lives which was typically only 7-10 more years, give or take. Retirees didn’t have to worry about something called Long Term Care yet and medical costs were still somewhat manageable with your old Blue Cross Blue Shield indemnity plan pretty much taking care of everything. Bottom line, retirement was more streamlined, easier in some ways to prepare for, but overall much shorter than it is today.
That traditional and very typical retirement structure is not dead but certainly on life support for a variety of reasons and not all of them bad. Most in what I call the “New Retirement” play by different rules. The goals and dreams of our parents are no longer our vision of how we want to spend our “golden years”. If you are not retired yet, you will need to define what your vision is and not think about it necessarily as a destination but perhaps more so a change of course of how you will live in the next phase of your journey.
I am noticing with our own clients that there are now three very specific templates they are deploying or targeting. I think our group is probably a good litmus test for what will continue to evolve over the next 20 years. The three structures are as follows:
The opinions voiced in this material are for general information purposes only and are not intended to provide specific advice or recommendations for any individual(s). To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Roy Larsen, CFP®, AAMS® is a CERTIFIED FINANCIAL PLANNER™ practitioner, financial advisor and wealth manager. Roy is President and CCO of Larsen Wealth Management, LLC, a Fee-Only Registered Investment Advisory Wealth Management firm in Cumming, Georgia. Roy is an expert in successful retirement living and specializes in holistically managing the multiple planning and investing issues surrounding the receipt of a large lump sum. Roy Larsen, CFP®, AAMS® is available in all 50 States. He can be reached for comment at 678-456-8138,email@example.com or www.investinretirement.net
Roy Larsen is a Certified Financial Planner™ practitioner and Fee Only Wealth Manager who resides outside of Atlanta, Georgia.
Roy's Financial Blog contains articles on multiple financial life events as well as his favorite questions from he receives from around the country as a an expert panel member for Investopedia's Advisor Insights.