There are many ways to implement a successful retirement strategy. One way is to carefully map out a sensible financial plan and stick to it through thick and thin. Another is just to wing it, using intuition and gut feelings, and hope for the best.

Although there seems to be no contest between these two courses of action, far too many investors choose the latter option when planning for retirement. Let's look at several common misconceptions when it comes to retirement planning, along with the correct ways of thinking and approaches.

Key Takeaways

  • Some common misconceptions regarding retirement planning include inaction: procrastinating until one's older, or relying entirely on Social Security benefits.
  • Some investment myths have to do with holding onto assets: the idea that long-term investments are dangerous, that you can't sell and then repurchase a security, and that paper losses are not real losses.
  • Even with professional management, investors need to monitor their portfolios.
  • Even retirees need to invest for capital appreciation.

Myth 1: Short-term Safety

The Misconception

You should constantly be moving in and out of stocks, timing the market. A buy-and-hold strategy is ultimately a losing one.

The Reality

Since 1957, the S&P 500 Index has returned an average of 10.13% per year (with dividends reinvested). Adjusted for inflation, the return is about 6.34% per year. Over the past 10 years, the index has returned 10.97% annually after accounting for inflation. Stocks typically outpace inflation over time, and despite some bearish periods, they have slowly risen in value and will likely continue to do so.

Of course, this doesn't mean just fund and forget. You (or your financial advisor) should periodically monitor your portfolio and its performance.

Myth 2: Paper Losses Aren't Real

The Misconception

If I don't sell a losing position, then I don't have a loss.

The Reality

This is sheer nonsense. You are losing money in a declining stock or other security, regardless of whether you actually sell it or not. You won't be able to claim a loss on your tax return if you don't actually divest, 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.

Myth 3: Leave it to The Pros

The Misconception

You can just let the money managers handle it.

The Reality

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 okay to delegate market trading and day-to-day decisions to a pro, but don't leave the overall course of your finances entirely in the hands of your broker or banker.

Myth 4: Hold On

The Misconception

Don't sell an investment and then buy it back again. Instead, just hold it.

The Reality

As mentioned previously, you can (and probably should) sell a depressed holding and declare a capital loss before the end of the year to get a tax deduction. There's no point in holding on. If the asset does recover, you could plunge in again.

However, just be sure not to buy an identical stock 30 days before or 30 days after the date of the sale of the original. Buying back in during this period will trigger the wash sale rule 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.

Myth 5: Social Security Solves All

The Misconception

Social Security benefits will sustain me through my retirement years.

The Reality

Dream on. The average monthly Social Security payment was $1,503 in December 2019. Of course, it varies, and some folks receive as much as $3,790 depending on their age and lifetime earnings. But as the administration will tell you, Social Security was never meant to be the only source of income for people when they retire. For medium earners, Social Security accounts for about 40% of their pre-retirement income.

The bottom line is that Social Security pays bare-subsistence income at best, and will certainly not provide you with 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. Especially given the ongoing concerns that Social Security could be insolvent by 2035, given the demographic shifts that have outlays exceeding incoming revenues.

Myth 6: Play It Safe

The Misconception

I should put all of my retirement money in totally secure income-oriented investments, especially after I stop working.

The Reality

Not necessarily. Obviously, low-risk vehicles are more of a priority at this stage in your life. Still, most retirees should have at least a small portion of their savings allocated to growth and 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.

Myth 7: Put Off 'Til Tomorrow

The Misconception

Retirement is a long way away, and so I won't have to worry about it for a long time yet.

The Reality

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 to sustain you through your non-working years. If you don't start saving as soon as you start earning, even if you're just in your twenties, then you won't have that time.