Misconceptions, misinformation and miscommunication are prevalent when it comes to retirement planning. Planning for retirement can be a stressful ordeal already, particularly for those over the age of 50. Add faulty understanding to the mix, and some retirees can actually destabilize even the most protected of financial plans.
Brokerage house Charles Schwab recently released a survey of nearly 1,000 respondents between the ages of 30 and 79 with an annual household income of at least $35,000 to get their views on the dos and don’ts of retirement planning. According to the “Money Myths” survey, those who believed themselves to be the most knowledgeable about financial planning were actually more likely to house misconceptions about the subject. Inaccurate information coupled with overly optimistic confidence in one’s financial planning habits can lead to risky – even detrimental – consequences, so make sure you have all the facts in place about retirement planning before it is too late.
Here are a few of the common myths respondents held about retirement planning:
Myth #1: Retirees should not have their money invested in the stock market.
According to the survey, 38-percent of respondents inaccurately claimed that retirees should not have their money in the stock market.
Stocks are essential assets in most people’s portfolios, including retirees. While it is recommended that older adults gradually decrease the percentage of stocks in their portfolios as they age, a diversified selection of stocks – whether in the form of individual stocks, mutual funds or ETFs – is the best way to protect your portfolio against long-term inflation.
Myth #2: You should start taking Social Security payments as soon as you’re eligible.
More than 50 percent of respondents thought that retirees should begin reaping the benefits of their Social Security checks as soon as possible.
Often, retirees who file for Social Security payments early or during their normal retirement age are leaving money on the table. By filing early, your benefit is reduced by five-ninths of 1% for each month prior to your normal retirement age, which means you receive a smaller payment each month. Those who utilize strategies to hold off on receiving their payments up to the age of 70 are actually credited for delaying their payments and, in turn, receive larger payments. The timing is based, of course, on your personal financial circumstances upon retirement. The strategies for making the most out of your Social Security payments are complex, and it is important to carefully weigh the benefits and options of your particular circumstance with the help of a financial professional.
Myth #3: By the time you reach 50, it is too late to change your financial future.
One in four respondents surveyed said it is too late to make a significant impact on your financial portfolio by the time you turn 50.
More than one-third of Americans say they don’t plan on retiring until the age of 70 or older, which means that a 50-year-old still has anywhere from 15 to 20 years of savings ahead. Additionally, there are catch-up contribution provisions in the tax code that are designed to help those who got a late start or fell behind.
Myth #4: Your 401(k) is a good place to turn for a loan or withdrawal if you need cash while you’re still working.
One-third of respondents said your 401(k) is a good place to borrow cash if you need it when you’re still working.
Prematurely withdrawing or borrowing money from your 401(k) plan is dangerous and can derail your retirement savings. A 401(k) loan might seem appealing because of the low interest rates, but not only are you paying back the loan with after-tax dollars, but you will also be taxed again when you withdraw the money in retirement. A 401(k) withdrawal is even more risky, as it is subject to taxes and a 10% penalty. Borrowing or withdrawing from your 401(k) should be an absolute last resort in an emergency situation. In either case, if you are unable to repay the withdrawn or borrowed expenses, the consequence can be quite costly.
Myth #5: You should purchase long-term care insurance in your 40s or younger.
Nearly half of respondents surveyed thought it best to purchase long-term care insurance by 40 years old.
For those in good health, the best time to consider long-term care insurance is between the ages of 50 and 65. Although your annual premium is lower if you purchase in your 40s or younger, you will end up paying more over a longer period of time by purchasing it too early.
Myth #6: Every adult should have life insurance.
Seventy-eight percent of respondents inaccurately believe that all mature adults should have life insurance.
Believe it or not, life insurance is not for everyone. Life insurance is optimal for those with children or other dependents, for business owners, or for those with significant liabilities that will continue long after you’re gone. While most people need it, retirees without dependents or large liabilities would simply be wasting money.
Myth #7: The best way to ensure your property is distributed the way you want is through a will.
A whopping 91% of respondents thought a will was the best way to ensure that your property is distributed how you want.
Although a will is necessary; it is not sufficient to ensure your property and assets are distributed how you intend. If your will and financial accounts are inconsistent in naming identical beneficiaries of your property, the designations in your financial accounts trump those in your will.
Myth #8: You should eliminate all your debt before you retire.
Eighty-eight percent of survey respondents said it is important to eliminate all debt prior to retirement.
Your personal circumstance, tax situation, and the type of debt you’re beholden to are all important factors in determining whether or not you should pay off your debt before you retire. Some debt – like a mortgage loan – is good debt because it can lower your interest and is deductible. Bad debt, on the other hand, should be paid off by the time you retire. Bad debt includes forms of consumer debt, like credit card debt, that are non-deductible and equal high interest.
Myth #9: If you need more money after retirement, you can always get another job.
More than one-third of respondents surveyed said they expect to receive income from a part-time job during retirement.
Predicting that you will be able or willing to work after retirement is a risky forecast to rely on. Although expectations of good health and a desire to work after retirement remains relatively high with 39% of respondents indicating that they expect to receive income from a part-time job during retirement. On the other hand, current statistics show that only 4% of current retirees actually receive compensation from part- or full-time employment.
Charles Schwab’s “Money Myths” survey showed that even those who thought of themselves as financially savvy individuals harbored at least a few myths or misconceptions about everyday aspects of financial planning. The best way to avoid making financially-detrimental mistakes based on these common myths is to educate yourself with facts and plan your future with a trusted financial advisor by your side.