There are many ways to implement a successful retirement strategy. One of them is to carefully map out a sensible financial plan and then stick to it through thick and thin; another is just to wing it, using your intuition and gut feelings and hope for the best. A large segment of the working population believes that their hunches will get them where they need to go without a solid foundation. This slideshow will address seven major misconceptions that people commonly harbor when it comes to retirement planning.
Intuition 1: It's Harder to Predict the Long Term
Numerous studies conducted by economists, market researchers and investment companies have repeatedly shown that it is often less risky to hold stocks for longer periods. It is extremely rare to find a 10-year period in which the market delivered a negative return. Stocks and real estate are the two big asset classes that have outpaced inflation over time, and despite some bearish periods, they have slowly risen in value and will likely continue to do so.
Intuition 2: If I Don't Sell, Then I Don't Have a Loss
You are losing money in a declining stock, regardless of whether you actually sell it or not. You won't be able to claim a loss, but the difference between realized and recognized losses is only for tax purposes. Your actual loss is the same regardless of what is or is not recognized on the tax return. (Learn to take losses in stride in Taking the Sting Out of Investment Losses)
Intuition 3: Let the Managers and Professionals Handle It
Although professional portfolio management is a wise choice in many instances, it is still necessary to be personally involved in the management of your finances. It's OK to delegate market trading to a pro, but don't leave your finances entirely in the hands of your broker or banker. Many people will take more time to find a deal on eBay than manage their retirement.
Intuition 4: Don't Sell an Investment and Then Buy It Back
As mentioned previously, you can sell a depressed holding and declare a capital loss before the end of the year to get a tax deduction. Just be sure not to buy an identical stock 30 days before and 30 days after the date of the sale. Buying back in during this period will trigger the IRS's wash-sale rules and will cause your capital loss claim to be void. If you have already made this error and filed your return, then you must file an amended return immediately. (Learn more about wash sales in Can IRA Transactions Trigger The Wash-Sale Rule?)
Intuition 5: Invest Everything in Low Risk Investments After Retirement
Not necessarily. You might be able to get away with this, but most retirees should have at least a small portion of their savings allocated to equities in some form, either through individual stocks or mutual funds. You need to sit down with your financial planner and run a realistic cash-flow projection that can predict with reasonable accuracy whether a portfolio with no market risk can sustain you through your retirement years. (Find out how much risk your portfolio can take by reading High Risk Retirement Portfolio Not Always Taboo.)
Intuition 6: I Don't Have to Worry About Retiring for a Long Time
This is perhaps the most dangerous myth of all. You will be poor and dependent upon relatives if you don't get this under control now. It will take time for your investments to grow to what they will need to be in order to sustain you through your non-working years. If you don't start saving now, then you won't have that time. (Learn more about how much waiting to save can cost you in Delay In Retirement Savings Costs More In The Long Run)
Intuition 7: Social Security Will Sustain Me in Retirement
Dream on. Social Security pays bare-subsistence income at best, and will certainly not provide you any kind of comfortable life. It might cover rent or a mortgage payment plus utilities, but the rest will probably be up to you. Don't count on Uncle Sam to meet all your retirement needs. The future of Social Security is in doubt as it is. (Find out how much social security you may be entitled to in How Much Social Security Will You Get?)
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