By Karen McIntyre
Websites and publications geared towards those contemplating retirement have countless articles on the do's and don'ts of retirement planning.
Even so, trying to formulate the right retirement strategy can cause sleepless nights that the warmest cup of milk just won't conquer. It's enough to make anyone's head spin! Below you will find eight of the most common retirement planning myths.
- As I near retirement, investments should be more conservative.
Americans are living longer. In fact, it's not unusual for retirement to last 25 to 30 years. Consider the rising costs of goods and services – particularly healthcare – and for most, some growth is mandatory.
- I can claim Social Security early and still get full benefits later.
Collecting at age 62 means locking in forever reduced benefits. When you collect early, your benefits will be 25 percent less than if you had waited until your full retirement age and as much as 75 to 80 percent less than if you delay collecting until age 70. Claiming early may make sense if you have an illness that impacts your life expectancy. Generally though, a key way to make sure you're maximizing Social Security benefits is to defer collecting as long as possible.
- Medicare will fully cover my medical expenses.
Medicare isn't meant to fully cover healthcare costs for aging adults. Research shows that about half of health expenses are covered by the government program. For dental and vision care, as well as hearing aids, you're on your own. And let's not forget about rising prescription costs, some of which may be covered under Medicare's prescription drug coverage (Part D) benefit.
- Once I retire, I'll buy a smaller house with cash and cut my expenses.
Holding a mortgage can help maximize your resources, particularly in today's historically low interest rate environment. Instead, invest in a balanced portfolio that provides greater long-term growth than the after-tax cost of borrowing. Also bear in mind that many retirees lack the discipline to actually reduce their lifestyle costs. Thus, any money saved by not having to make monthly mortgage payments ends up going to other expenses.
- I can buy a retirement target-date mutual fund and ignore it.
Target-date funds automatically adjust to a more conservative asset mix as the fund's target "retirement" date approaches, but the allocation of this mix can vary widely. The Securities and Exchange Commission (SEC) found that the stock percentages of multiple same date target retirement funds can vary widely, ranging anywhere between 25 and 65 percent. It's essential that you understand how your fund's allocation changes over time to ensure it continues to be appropriate for you.
- I can diversify by spreading money throughout my retirement plan.
Owning a lot of mutual funds does not ensure proper allocation of money to stocks or bonds. In fact, most plans have more stock than bond options. You can actually be well-diversified with just one fund by picking a balanced asset-allocation or target-date retirement fund.These funds hold hundreds (if not thousands) of stocks and bonds inside one mutual fund.
- Owning top performing funds is the way to go.
Picking the top performing funds may seem like good advice, however, today's top performers may be in the bottom in no time. Standard and Poor's looked at the top 25 percent of mutual funds in various categories and charted their comparative performance five years later. The funds that started at the top were less likely to continue being a top performer than other funds that had initially been ranked lower. Instead of looking at past performance, you should compare the costs of similar types of funds. Studies have shown a correlation between low costs and superior investment results.
- I can rely on rules of thumb.
Well-meaning advice such as "own your age in bonds" or "don't retire unless you have one million dollars" isn't for everyone. Taking overly general advice is one of the more common financial mistakes retirees make. Depending on retirement income, expenses, longevity and other factors, your needs will vary greatly from your neighbor's. Rely on personalized projections from a qualified professional.
Karen McIntyre, CFP® is a Managing Director and Senior Financial Advisor with Wescott Financial Advisory Group LLC.The firm has offices in Philadelphia, Boca Raton, Miami and San Francisco.