We are fortunate to have a very educated and knowledgeable client base, but we are consistently surprised by the myths and misconceptions clients and prospects bring to the conversation. Below I have listed my Top 7 Myths and Misconceptions About Retirement Savings; it is by no means a complete list but highlights the most common misunderstood areas in retirement planning.
1) Roth accounts are for young people
We are HUGE fans of Roth accounts for a variety of reasons, many of which have been detailed in previous Atheneum chapters. Simply put, there is no better place to have retirement dollars: tax-free growth, tax-free distribution, and no required minimum distributions (in most cases). Unfortunately, Roth IRAs and Roth 401ks have not been around long enough for many people to make this account type the cornerstone of their retirement plan. Our clients in their 50s, 60s, and 70s are often surprised when we encourage funding to Roth accounts. The benefits are massive, and it is rarely ever too late to start.
2) There is a typical retirement income need
One of the most common first questions I receive from a new prospect or client is “How are we doing?” As if I took the client’s blood pressure, they want to know if they are in the “healthy range.” This is a question we will inevitably answer but, in many cases, the clients want to know if their dollar amount saved or net worth is commensurate with someone in a strong financial position. The problem with this question is that I have come across families with little saved who are perfectly fine due to fixed income/pension income paired with low living expenses. We have also witnessed the opposite: a client with millions in net worth but considerable obligations, debts, and/or a lifestyle that weighs heavily on retirement savings.
3) Saving in pre-tax retirement accounts is the best method
This issue of over-savings in retirement accounts is an enviable problem, and a rather new one. In the last few years, we have encountered a number of clients who have been quite disciplined in their retirement savings accounts through work, accumulating substantial account balances. Again, this is not a terrible problem. However, when these clients reach age 70 1/2, they are required to start drawing on their retirement accounts and in many recent cases we have encountered, the required distribution is well in excess of their need. This unpredicted and (at face value) enviable situation will often push clients into high tax brackets, negating much of the impact of their savings strategy. As Brian highlighted in a previous Atheneum, we encourage additional savings in Roth and taxable accounts. With greater flexibility and a more forgiving tax code on dividends and capital gains (at least currently), you will find retirement cash flow much more tax-efficient.
4) My pension does not impact how I should save or invest
I would estimate that one out of seven of our clients has a pension of some type. As companies and governmental bodies have modified their retirement benefits, we believe that number will continue to shrink. Even small pensions create a considerable planning opportunity, allowing a more conservative or aggressive portfolio allocation with other funds you have saved, depending on your position. We see this clearly when we model retirement income projections for our clients; any type of guaranteed fixed income will strengthen your plan and consequently allow you to take more risk or possibly de-risk your investment allocation.
5) Tax deferral is always a good idea
We find more misconceptions about retirement savings tax treatment than any other area. Our belief is that so much focus is placed tax minimization that people often make short-term decisions that they eventually pay for many times over in the future. Tax deferral is one of these decisions. Anyone can purchase an investment through an insurance company that provides deferral of income taxes; at its core, this seems like a good move. Over a period of a few to several years, issues rarely arise. The problem arises if this deferred tax is never addressed. The IRS requires that these investments are taxed LIFO (Last-In, First-Out). Simply, all of the growth of the investment must be taxed before you touch your principal. For people using these accounts to draw from in retirement, they often pay tax on every dollar they draw. The decision to save in the short run is punished in the long run. Fortunately, there are usually creative strategies that we have used to address this issue with clients.
6) A budget including savings will make you feel restricted
A good budget should be liberating. Wait, what? Yes, I said it. The biggest issue I see with people’s budgets is that they are far too detailed and impossible to live up to. Much like a person who tries to lose 30 pounds in a month, the likelihood of success is quite low because they have created an impossible goal allowing little to no leniency. A good budget should start by encouraging key behaviors, behaviors that will soon turn into habits: Taking cash out at the beginning of the week and not using credit cards, monthly deposits to retirement accounts, creating an annual travel budget with funding, etc. A good budget will relieve anxiety about your financial decisions because it is based on, and contributes to, the long-term success your financial plan.
7) It’s too late to make a difference
I have seen people make remarkable progress in their financial plan in just a few years. The important thing is to start! So much of financial planning is psychology and training yourself to engage in beneficial behaviors. Even simple tasks like establishing a working and retirement budget can make a massive impact on your long-term plan success.
The overriding theme of all of the above misconceptions is to not assume anything you hear or read applies to everyone. Blogs, radio shows, and financial publications mostly do a nice job of giving general, factual advice, but too often people take this guidance as universally applicable. It is not. Our job is to tailor your plan around you; there is only one of you and there is only one plan appropriate for you.