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.
Although there seems to be no contest between these two courses of action, far too many people choose the latter option when planning for retirement. A large segment of the working population believes that their hunches will get them where they need to go without a solid foundation. Let's look at several major misconceptions that people commonly harbor when it comes to retirement planning—along with the correct ways of thinking and approaches.
- 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
You should constantly be moving in and out of stocks, timing the market. A buy-and-hold strategy is ultimately a losing one.
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 stock 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.
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
If I don't sell a losing position, then I don't have a loss.
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
You can just let the money managers 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 and day-to-decisions to a pro, but don't leave the overall course of your finances entirely in the hands of your broker or banker. Many people will take more time to find a deal on eBay than they'll spend looking at their retirement portfolios.
Myth 4: Hold On
Don't sell an investment and then buy it back again; instead, just hold it.
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 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.
Myth 5: Social Security Solves All
Social Security benefits will sustain me through my retirement years.
Dream on. The average monthly Social Security payment for retirees was $1,471 in June 2019. Of course, it varies greatly, and some folks receive more, as much as $3,700 depending on their age and lifetime earnings. But, as the SS administration itself tells you, benefits were never intended to be more than 40% of your pre-retirement wages, anyway.
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 bankrupt by 2035, given the demographic shifts that have outlays exceeding incoming revenues.
Myth 6: Play It Safe
I should put all of my retirement money in totally secure income-oriented investments, especially after I stop working.
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
Retirement is a long way away, and so I won't have to worry about it for a long time yet.
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.