Setting the record straight on common retirement myths

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Frank Randall, Regional Director, Retirement Plan Services

It’s National Retirement Planning Week and an important time to take a closer look at some of the common myths that if followed, could decrease your spending power, and your happiness, in retirement.

  1. “It’s too late to start saving now.” Even in your late 40s or early 50s, you still have 15 to 20 years to grow your nest egg. The government has given incentives by enacting tax laws designed to help people over the age of 50 to contribute a little extra to retirement plans so they can catch up as retirement nears.
  2. “I can’t start saving for retirement until I pay off my debt.” Not all debt is bad. A financial advisor can help you differentiate between debt you can carry and the debt you should prioritize paying off over retirement savings (i.e., high-interest credit cards).
  3. “I’ll start saving after I get my kids through college.” Borrowing for college is easier than borrowing for retirement.
  4. “I need to be super conservative in my investments so my money will last.” The flaw in this strategy is that it doesn’t consider the impact of inflation. While inflation has been tame in recent memory, even at 2-3% over long periods of time, inflation can have a devastating impact on wealth.
  5. “It’ll just be me (and my spouse).” Many retirees either underestimate or do not anticipate the financial toll associated with providing financial support to their adult children, yet over one-third (36%) of the young adults ages 18-31 live with their parents. It’s not uncommon for the adult children to have children of their own, adding layers of both complexity and expense. Furthermore, Securian Financial Group reported that only 10% of the adult children living with their parents contribute to the household finances (e.g., pay rent). Retirees may also have the added expense of providing care to elderly relatives. In a recent blog, John Solomon, EVP of our Wealth Advisory group, pointed out that 25% of adults, mostly Baby Boomers, provide care to a parent.
  6. “I’ll pay it back.” Avoid borrowing against your retirement account. Even if you repay the loan, your nest egg will suffer because you will probably incur interest charges and fees. In addition, you will miss out on the compounding effect of the original funds, your contributions may be suspended while the loan is outstanding, and you will be more likely to sell low and buy high.
  7. “I won’t have to pay as much in taxes.” In retirement your income will be lowered, which will in turn lower your effective tax rate. Keep in mind; however, cost of living is impacted by all forms of taxes, including state income tax, local income tax, property tax, sales tax, capital gains tax, and Medicare tax. Also, in retirement you’ll likely have fewer federal deductions and dependents to claim, so a greater percentage of your income goes to the government.
  8. “Medicare will cover my health care expenses.” Medicare doesn’t cover everything, and the items not covered can add up. The Center for Retirement Research at Boston College estimates out of pocket medical care expenses for retirees at approximately $4,300/year for individuals and $8,600/year for couples. These amounts don’t include long-term care expenses. Many retirees purchase supplemental policies (called Medigap) to cover co-pays, deductibles and other expenses that Medicare does not. Medigap policies can ultimately cost you more than you paid for health care covered when employed.
  9. “I won’t have as many expenses.” Retirement expenses might not be as low as you think. Unstructured time often leads to greater spending. Also, many people wait until retirement to increase travel and pursue hobbies when work is no longer standing in the way.
  10. “I will have more time to study the markets in retirement.” The more you know about investment principles and the long-term historical record of the market, the better outcomes you can expect to achieve in your retirement portfolio. The American Association of Individual Investors found that investing knowledge enhances risk-adjusted returns by at least 1.3% annually. Over 30 years, the improved portfolio performance leads to 25% greater wealth. So, don’t wait until you are in retirement to begin studying up on investment principles. Start today.
  11. “I don’t need help.” While your financial mission in retirement may seem straightforward—to not outlive your money—the decisions you face along the way can be complicated. An experienced financial advisor can help you manage your retirement portfolio to meet your preservation and growth objectives, help you establish an income strategy matched to your spending needs, and track your spending versus assumptions. If a crisis arises, a trusted financial advisor will know your financial history and can help make decisions in your best interests.

For over 10 years, Brinker Capital Retirement Plan Services has worked with advisors to offer plan sponsors the solutions to help participants reach their retirement goals. When plan sponsors appoint Brinker Capital as the ERISA 3(38) investment manager, this allows them to transfer fiduciary responsibility for the selection and management of their investments so they can focus on the best interests of their employees.  This fiduciary responsibility is something that Brinker Capital has acknowledged, in writing, since our founding in 1987.

Click here to learn more about Brinker Capital Retirement Plan Services.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

Debt and Skepticism: A Millennial Mindset

Dan WilliamsDan Williams, CFPInvestment Analyst

Having overshot 30 by a couple of years, I have had to come to terms with the many changes that come with my new age group. Some good, such as lower car insurance rates. Some bad, such as feeling that 9:00pm is closer to the departure time rather than arrival time for a social gathering. Some are mixed; being called “sir” with a high consistency and no tone of irony. I am also no longer considered to be part of the “young adult” group that is said to represent the emerging consumers in the economy and, subsequently, more closely studied by market researchers. These new kids on the block, known as the Millennials, had the financial crisis occur just as many were entering college and the workforce and were beginning to make their first big life decisions. Not surprisingly, they now think about money differently than I did at their age, just a brief decade ago. So what is the current financial mindset of this group some seven years later?

Goldman Sachs reported, in a June 2015 study, as shown below, that this group upon receiving a windfall of cash would look to pay down debt more than any other option by a wide margin.

Williams_chart1

Goldman Sachs Research Proprietary Survey

The result is not entirely unsurprising given that a majority of college students graduate with debt and, often, this debt is of a daunting amount. However, the magnitude of this victory reflects an overall conservative outlook on how to manage their financial matters.

The second finding, shown below, is of greater concern as it shows Millennials to be very skeptical of investing in the stock market. When asked whether investing in the stock market was a good idea for them, less than 20% answered that the stock market is the best way to save for the future. Approximately twice this amount claimed ignorance, fear of volatility, or lack of perceived fairness as reasons to avoid the stock market. Clearly, the events of the financial crisis have left scars on this group that have yet to heal.

Williams_chart2

Goldman Sachs Research Proprietary Survey

I am left feeling very conflicted for this group’s future financial health. On one hand, it’s very admirable that, unlike some prior young adult groups, this group has realized early on that debt is not something you simply attempt to defer payment of indefinitely. At least in the case of high interest credit card debt, it is hard to find fault with the pay-down-the-debt option as a sound financial decision. However, an inflexible focus on debt repayment combined with shunning or deferring of investing in the equity markets represents a significant challenge to this group’s ability to save meaningfully for the future.

Quite simply, equity investing has been proven to be one of the best ways to grow purchasing power over time. One advantage the Millennials have is ample time to invest, ride out periods of market volatility and let returns compound. To forego any portion of this advantage has potential to be tragic for future savings. Consider a one-year delay in retirement investing at the start of a career The missed opportunity is more than just the amount of one year’s contribution; rather that one year’s contribution compounded with typically 40+ years of returns until retirement. Over 40 years, a single $5,000 investment compounded at 8% becomes over $100,000. Six consecutive years of $5,000 contributions compounds to over $500,000. This is the potential cost of delaying investing just for “a couple of years.” In other words, earlier contributions are invested longer and can compound to greater amounts. On a per-dollar basis, these are the most impactful retirement contributions.

Contribution at start of year Value of contribution at end of year 40, assuming 8% return per year
Year 1 $5,000 $108,622.61
Year 2 $5,000 $100,576.49
Year 3 $5,000 $93,126.38
Year 4 $5,000 $86,228.13
Year 5 $5,000 $79,840.86
Year 6 $5,000 $73,926.72
Total $542,321.72

Source: Brinker Capital

Albert Einstein said, “Compounding interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” More attention is given by advisors to older clients with more assets and fewer years until retirement. Often this is due to the fact that clients become more tuned into investing matters as they begin to see the light at the end of the tunnel (whether it be the light of retirement or the oncoming train of insufficient savings). However, the greater opportunity for advisors to help a client’s future financial situation occurs earlier on in a client’s investment life. Helping young clients start off with good financial decision making, such as early investing, and letting these good decisions compound, is likely one of the best ways he or she can add value. Each client situation is different as each client has different goals. However a secure retirement is likely a very common dream and as Langston Hughes wrote, “A dream deferred is a dream denied.” Anything that we can do to ensure those dreams are not deferred is truly good work.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Retirement Planning: Beware of the Boomerang

Sue BerginSue Bergin

Unexpected events wreak havoc on many retirees’ portfolios.  According to a recent study, unexpected life events cost retirees on average $117,000. [1]  While caring for an adult child falls in the “unexpected events” category, recent trends suggest it is becoming a commonplace scenario.

The number of young adults, ages 18 to 31, living with their parent’s increased four percentage points from 2007 to 2012.  Now, over one-third (36%) of the young adults in that age category live with their parents.  Many of these adult children have children of their own, adding layers of both complexity and expense.  Pew Research Center attributes the multigenerational dynamic to declining employment, underemployment, rising college enrollment and declining marriage rates.[2]

In a separate survey, Securian Financial Group found that only 10% of the adult children living with their parents contribute to the household finances (e.g., pay rent).[3]  The Pew study reported that 22% of adult children still received an allowance from parents and 80% of the adult children living at home said they did not have enough money to live the life they wanted. Conversely, only 55% of their independent-living counterparts had the same response.

The boomerang-child pattern is nothing new.  It has surfaced during other economic downturns.  However, experts suggest that there may be some generational dynamics at play associated with this current wave of boomerangs that make it different from others. Those dynamics include a pervasive entitlement mindset, inflated self-esteem, and bumpy on- and off-ramps to the labor force.

Bumpy on-ramps refer to the fact that college graduates are having a difficult time finding employment.  Bumpy off-ramps refer to delayed retirements and boomers having to work longer than originally planned for.

While the debate rages as to the merits of adult children returning to the roost, one point is irrefutable.  Boomerang children create a drag on the parents’ retirement.

Boomerangs & Their ImpactIt is natural to want to help your children, at any age.  The child, however, should know the risks that you, as parents, assume if you agree to the arrangement.  The child probably dwells on the relationship risk potential, but should also be aware of the financial and lifestyle risk impact.

If the new financial impact on the parent is left unsaid, it will go unnoticed.  This fact is supported by Securian’s survey of Millennials who live with their parents.  45% of the surveyed young adult demographic said that their living at home has not financial impact on their parents, and almost half of that group said they weren’t even sure of the impact.

Other interesting stats from Securian:

  • Only 4% acknowledge their parents delayed retirement to accommodate the living arrangement
  • 8% said their parents did not request cost-sharing
  • Only 9% of the parents put a pre-determined end date or set conditions for how long the adult child could stay.

There may be tips and tools out there, but working face-to-face with a financial advisor can help add value.  It’s important to assess the financial risk associated with having an adult child come return to live in your home.  A skilled advisor can help project anticipated increases in living expenses as well as the impact on your retirement. This will help establish parameters, set expectations, deepen the child’s understanding of what is at stake for you, and foster open communications. And maybe even make it an enjoyable living situation for all!