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.

You Don’t Have a Plan

frank_randallFrank Randall, AIF®, Regional Director, Retirement Plan Services

People anticipate that they will finish their own tasks earlier than they actually do. Consider the following example. Employees who carry home a stuffed briefcase full of work on Fridays, fully intending to complete every task, are often aware that they have never gone beyond the first one or two jobs on any previous weekend.

The psychological term for this is called “planning fallacy” and it is the reason that we are often a day late and a dollar short. In a phrase, the planning fallacy is the human tendency to underestimate the time and resources necessary to complete a task. When applied to a lifetime of financial decision-making, the results can be catastrophic.

There are a variety of hypotheses as to why we engage in this sort of misjudgment about what it will take to get the job done. Some chalk it up to wishful thinking. A second supposition is that we are overly optimistic judges of our own performance. A final notion implicates “focalism” or a tendency to estimate the time required to complete the project, but failing to account for interruptions on the periphery.

Whatever the foundational reasons, and it is likely there are many, it is clear enough that the American investing public has a serious case of failure to adequately plan. Excluding their primary home value, 56% of Americans either have less than $10,000 or no retirement savings at all. 43% of Americans are just 90 days away from poverty and 48% of those with workplace retirement savings plans fail to contribute.1 Perhaps we think we are special. Maybe we are simply too focused on the day-to-day realities that can so easily hijack our attention. Without a doubt, we may wish that the need to save large sums of money for a future date would just resolve itself.

Solution: Antoine de Saint-Exupery famously said, “A goal without a plan is just a wish” and yet the majority (60%) of investors surveyed by Natixis in 20142 said that they had no formal financial plan or goals. If you do not have a formal, updated financial plan in your possession, you lack the road map necessary to begin the journey toward retirement. Most financial planners are happy to create such a plan for a small fee so start today!

For 10 years, Brinker Capital Retirement Plan Services has been working with advisors to offer plan sponsors the solutions to help participants reach their retirement goals.  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.

Sources:

1 “Myth of the Middle Class:  Most Americans Don’t Even Have $1,000 in Savings,” www.salon.com, Ben Norton, January 14, 2016.

2 “Getting to the Goal:  Markets, emotion and the risks advisors must manage,” Natixis, 2014

Money Missteps to Avoid in Retirement

frank_randallFrank Randall, AIF®, Regional Director, Retirement Plan Services

 “Good decisions come from experience,

and experience comes from bad decisions.”

By the time you feel ready enough to retire, you have likely had your fair share of blunders along the way. Now seasoned with experience, the realization that mistakes are inevitable, and having the ability to recover can make the difference between success and failure.

Here are some of the most common missteps in retirement:

  • Focusing on the wrong factors. Many people decide to retire when they reach a certain age, job fluctuations or business cycles. While these factors may have influence, your emotional readiness, savings, debt, future budget and income plan to sustain your desired lifestyle must also be considered.
  • Overlooking the importance of your Social Security election. Some experts say the difference between a good Social Security benefit election and a poor one could equate to more than $100,000 in income.[1] The biggest decision retirees face concerning Social Security is when to start collecting. Just because you can start receiving benefits at age 62 doesn’t necessarily mean you should. If you delay your election until age 70, you may receive 32% more in payments so it may make sense to delay receipt of benefits as long as you can meet your expense obligations.
  • Underestimating the cost of retirement. Most people estimate retirement expenses to be around 85% of after-tax working income. In reality, however, many retirees experience lifestyle sticker-shock as the realities of retirement. One common problem retirees have when budgeting for retirement expenses is that they overlook items like inflation, future taxes, health care, home and car maintenance, and the financial dependence of their loved ones (e.g., sandwich generation costs).
  • Retiring with too much debt. A simple rule of thumb is to pay off as much debt as possible during your earning years. Otherwise, debt repayment will cause a strain on your retirement savings.
  • Failing to come up with an income strategy. Saving is only part of the retirement planning process. You also have to think about spending and decide where and in what order to tap investments. When thinking about cash flow needs throughout retirement, one must also consider how retirement funds can continue to generate growth. An effective way to solve retirement income needs is to have a liquid cash reserve account tied to your portfolio.  The reserve is tapped to deliver a “paycheck” to help you meet predictable expenses. The cash withdrawn is replenished by investments in dividend- and income-producing securities.
  • Dialing too far back on investment risk. As many workers near retirement, they become fixated on cash needs, thus dialing back risk and becoming more conservative in their investments. Unfortunately, the returns generated by ultra-conservative investments may not keep pace with inflation and future tax liabilities. Because retirement can last upwards of 20 years, retirees must set both preservation and growth investment objectives.
  • Not validating the assumptions made during the retirement planning process. You make certain assumptions about investment performance, expenses, and retirement age when you initially create your projected retirement plan. At least annually, you should reconcile your projections against reality. Are you spending more and earning less than anticipated? If so, you may have to make changes, either to your plan or your lifestyle.
  • Providing financial support to adult children. Over the last decade, the number of adult children who live with their parents has risen 15% to a historic high of 36%. Providing financial support to anyone, particularly an adult child, is stressful. It could strain retirement savings and ultimately could create long-term financial dependency in your child.
  • Going it alone. While your financial mission in retirement may seem straightforward—don’t outlive your money—the decisions you make along the way can be complicated. An experienced financial advisor can give you piece of mind for many reasons. An advisor can help you manage your retirement portfolio to meet your preservation and growth objectives, help you establish an income strategy that is matched to your spending needs, and track your spending versus assumptions. If a crisis arises, a trusted financial advisor will already know your financial history and can help make decisions that are in your best interests. Similarly, it is extremely helpful to have a trusted advisor relationship solidified in the event your cognitive abilities decline and you need help with decisions.

[1] http://www.cbsnews.com/news/a-great-new-tool-for-deciding-when-to-take-social-security/

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.