This post by Andrew Herrig addresses some wrong retirement advice that some people believe. It was originally published on Wealthy Nickel and we have been given permission to republish it.
Planning for retirement today is a lot different than it was thirty years ago.
Pensions are a thing of the past, the longevity of social security is iffy, and the stock market seems to be one bubble after the next. Unfortunately, the clichés of retirement advice haven’t changed much, and many are badly outdated.
According to money experts, here is some of the worst advice most people still believe, but you should definitely avoid.
Bad Advice #1: $1 Million in the Bank Equals Retirement Success
Rules of thumb are attractive because they make the complex simple to understand. Believing that a certain dollar amount is the main factor that determines your retirement success may be misleading.
Years ago there was a popular TV commercial where a client was walking around with a large $1 million dollar theater prop under his arm. He was carrying this large number around town like a trophy and it took both arms to hold it.
But it turns out that a certain dollar amount is misleading if you don’t factor in your projected retirement expenses and what your related cash flow might be.
Rules of thumb like the 4% rule are meaningless unless they are related to an individual strategy which takes into account your personal cash flow needs and some type of investment allocation model which is designed with your unique goals in mind.
Bad Advice #2: Annuities and Whole Life Insurance Will Protect Your Income
You must avoid falling for expensive insurance and annuity sales tactics that are too good to be true. Variable annuity sales increase when the stock market has declined.
Creating & sticking to your financial and investment plan will help you avoid costly mistakes like this.
Bad Advice #3: You Can’t Afford a House Because of Your Starbucks Habit
The dumbest piece of advice nowadays is that your morning Starbucks and Netflix subscription is what’s stopping you from buying a house.
When house price inflation is in double figures, on the average salary, the best you can do is to save enough to stand still.
Stopping these costs won’t move the needle in saving for a house but will make a difference in saving for retirement.
With regret, I started investing way too late in my career, and I’m paying for it now, so start as early as you can, and you’ll have more choices later in life.
Bad Advice #4: Always Withdraw From Taxable Accounts First
One primary mistake is spending from the wrong accounts! Conventional wisdom has led consumers to believe the order of withdrawals should be: taxable accounts first, tax deferred next (401ks, IRAs) and tax free last (Roth 401ks or Roth IRAs).
The problem is this often leads to a tax trap when required minimum distributions (RMDs) begin at age 72.
Oftentimes, the RMDs are MORE income than is needed because of diligent saving and investing during the accumulation phase. This could result in higher tax rates and potentially higher medicare premiums.
A better solution is to customize your income plan! Take advantage of the early retirement years before RMDs begin to either spend down some of those tax deferred accounts or perhaps do Roth conversions!
Bad Advice #5: You Should Only Invest in ‘Income-Producing’ Assets
I often hear one piece of bad retirement advice over and over: You need to be in an income-generating portfolio. This is a very flawed and inefficient way of designing a portfolio. What people should be discussing is ‘total return’ as it pertains to a portfolio.
Total return focuses on all elements of the portfolio, not just the income and principal. The total return on an investment or a portfolio includes both income and appreciation.
Income-focused portfolios actually have the potential to reduce diversification due to a focus on mostly holdings that generate dividends or income.
Many advisors like to talk about the income-generating portfolio because they either don’t know better or because psychologically, their clients like the sound of it (it allows the client “protection of principal”).
Odds are, if you want your money to last, it’s going to need to grow; not just produce dividends and income.
Bad Advice #6: Retiring Abroad Will Save You Money
Many retirees assume that moving abroad to a country with a lower cost of living is a sure-fire way to save money. This assumption couldn’t be further from the truth!
Many retirees spend more money trying to feel comfortable in a foreign country than they would have spent staying at home.
The costs can add up quickly, and adjusting to a new environment is hard, especially one with a new language, currency, and customs. Retiring abroad can be an excellent option for some, but it’s not a decision to take lightly.
Bad Advice #7: Trying to Predict Future Tax Rates
One mistake I often see is the failure to diversify your retirement savings from a tax perspective. Investors tend to contribute only to a traditional workplace retirement plan or a traditional IRA. They fail to consider opening a taxable account and or a Roth account.
Investors know the importance of investment diversification; they allocate their investments across asset classes, sectors, and countries.
They’re well aware that investing all of their assets in one industry or one business could be perilous. By failing to diversify the tax style of their investments, investors are predicting where taxes will be in the future.
Will you be earning more or less in the future, will taxes increase or decrease, will Required Minimum Distributions change, and will Roth options be available in the future? Who knows?
That’s why I believe it makes sense for investors to consider diversifying the tax type of their retirement savings.
Bad Advice #8: Retirement Strategies Are One-Size-Fits-All
Thinking of strategies in absolutes is really bad advice. I see many consumers that read about a retirement strategy (for example: 4% rule, annuities, index funds, etc.) and then think that strategy is either correct for 100% of people or wrong for 100% of people.
You don’t get a second chance at retirement, so it’s VERY important to stay strategy agnostic when it comes to retirement and utilize a strategy that is specific to each retiree.
Rather than having the optimal mathematic strategy, it’s important to have the optimal strategy for that specific client (one they can stick with), blending the art and science of finance.
Bad Advice #9: Just Contribute to Your 401(k) and Don’t Think About It
The “set it and forget it” approach to retirement planning is becoming less and less popular, and often may not be sufficient.
As many young professionals are seeing more value in flexibility and freedom over buying property and new cars, retirement planning now takes more creativity than just contributing to ones 401(k) or assuming a pension will be there for you no matter what.
Putting a stake in the sand where you think you may want to be in the future and analyzing the paths to get you there is wise advice, even as life forces you to course correct along the way.
Bad Retirement Advice (That Most People Still Believe)
There is a ton of bad retirement advice out there. Some pieces of advice are just outdated, while others are more sinister – pushing expensive products that 99% of people don’t need that make financial companies a lot of money.
By being able to separate the good advice from the bad, you are one step closer to a successful retirement.
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