There are many financial pundits and websites that attempt to turn complex financial topics or strategies into “one size fits all” rules of thumb. And some of these have been repeated so much that investors could be forgiven for thinking there really are rules that must be followed. Some may have been more applicable in days gone by, which is one reason these misconceptions should be debunked: the markets, economy, fiscal and monetary policy and other global dynamics are constantly changing which means that what may have worked a decade or more ago may no longer work today. But the moral of the story is that each investor’s situation is unique, and their financial and retirement strategies should be tuned to the intricacies of their situation, not some talking head or blogger (including yours truly).
So, below are some well-worn retirement financial myths and why we think you should ignore them:
MYTH: The bond allocation in your portfolio should be equal to your age
- The thinking goes that your portfolio should become more conservative as you get older, so if you can remember your age, then you know the percentage of bonds you should hold. Not every financial strategy needs to be complex and sophisticated, but this myth might take the cake for oversimplifying. Lifespans have increased significantly over the last 100 years, so holding too much in bonds could overexpose your portfolio to the considerable impact of inflation over time.
- A more comprehensive way to determine how much to hold in stocks versus bonds is to consider your time horizon for using your assets, your tolerance or comfort level with risk and other resources you have available (such as pensions or Social Security). Also, do you plan on leaving a sizable portion of your portfolio to your heirs? If so, your heirs’ time horizon could be taken into account as well.
MYTH: You can’t have a mortgage in retirement
- For many, being mortgage-free is equated with financial freedom, and therefore, retirement isn’t feasible until the mortgage is paid off. But diverting a significant portion of your savings to your home equity likely isn’t prudent as it then becomes less accessible. And since over half of U.S. homeowners have a mortgage interest rate of less than 4%, you’re better off keeping those funds invested to produce a higher rate of return over time (depending on your risk profile) along with the potential to create a stream of retirement income. Although only available if you itemize, mortgage interest is still tax deductible which can help offset the tax burden on retirement income and Required Minimum Distributions (RMD).
MYTH: A stock market crash is your biggest financial risk in retirement
- There’s no question that stock market crashes are uncomfortable and concerning, but retirees with a well-diversified portfolio that is aligned with their risk tolerance, time horizon, risk capacity and income needs should be well-positioned to weather inevitable periods of volatility and occasional bear markets.
- A potentially larger and overlooked risk is longevity or outliving your assets. As mentioned above, advances in modern medicine along with healthier eating and lifestyle habits have dramatically increased lifespans. Fidelity reports that for a couple both age 65, there’s a 50% chance of one spouse surviving to age 97. With longer lifespans also comes the possibility of more unexpected health crises, chronic illnesses or the need for long-term care which also could put a strain on retirement savings.
- These potential risks illustrate the need for a portfolio that is positioned to provide growth and income for the long-term along with ongoing planning which assumes an appropriate life expectancy, health status (including family medical concerns) in addition to income needs and resources available. Other strategies may include delaying Social Security benefits or evaluating the need for long-term care insurance for those with a higher risk of debilitating but not necessarily life-shortening ailments like dementia or Alzheimer’s or those with the risk of spousal impoverishment in the event of a significant long-term care need.
These are just a few among many misconceptions that pre-retirees and retirees are likely to face at some point. The danger with rules of thumb is that they tend to oversimplify complex and nuanced issues to reach the broadest possible audience. But in financial planning, the nuances of your situation matter because it’s your retirement you’re planning for, and your plan should reflect that.
The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding investments, sectors or markets in general. The above statistics and/or commentary have been obtained from sources we believe are reliable, but we cannot guarantee their accuracy or completeness. Past performance is no guarantee of future results.
Specific securities discussed herein are illustrations and do not represent securities purchased, sold or recommended for client accounts. Such information does not constitute, and should not be construed as, a recommendation to buy or sell specific securities.
This is not a complete analysis of every material fact regarding any company, industry, or economic condition. Due to shifting market conditions, all expressions of opinion are subject to change without notice.
The information contained in this document does not constitute the rendering of legal, accounting, or other professional advice or opinions on specific facts or matters. Before implementing any ideas suggested here, consult with your tax advisor regarding your specific tax situation.
Talk to your financial advisor before acting on information in this document.