Retirement Saving Myths and Misconceptions
By John Boardman and Ballast
At Ballast, we are fortunate to have a very educated client base, but we are consistently surprised by the myths and misconceptions clients and prospects bring to the conversation. Listed below are seven myths about retirement savings; it is by no means a complete list, but it does highlight some of the most misunderstood areas in retirement planning.
1 – MYTH: Roth accounts are for young people
We are HUGE fans of Roth accounts for a variety of reasons. Simply put, there is no better place to have retirement dollars: tax-free growth, tax-free distribution, and no required minimum distributions (in most cases). Unfortunately, Roth IRAs and Roth 401ks have not been around long enough for many people to make this account type the cornerstone of their retirement plan. Our clients in their 50s, 60s, and 70s are often surprised when we encourage funding to Roth accounts. The benefits are massive, and it is rarely ever too late to start.
2 – MYTH: There is a typical retirement income need
One of the most common first questions from a new prospect or client is “How are we doing?” Like a client’s blood pressure, they want to know if they are in the ‘healthy range.’ This is a question we will inevitably answer but, in many cases, the clients want to know if their dollar amount saved, or net worth is commensurate with someone in a strong financial position. The problem with this question is that some families with little savings are perfectly fine due to fixed income/pension income paired with low living expenses. We have also witnessed the opposite: a client with millions in net worth but considerable obligations, debts, and/or a lifestyle that weighs heavily on retirement savings.
3 – MYTH: Saving in pre-tax retirement accounts is the best method
This issue of over-saving in retirement accounts is an enviable problem and a rather new one. In the last few years, we have encountered several clients who have been quite disciplined in their retirement savings accounts through work, accumulating substantial account balances. Again, this is not a terrible problem. However, when these clients RMD age, they are required to start drawing on their retirement accounts. In many recent cases we have encountered, the required distribution is well in excess of their needs. This unpredicted and (at face value) enviable situation will often push clients into higher tax brackets, negating much of the impact of their savings strategy. We encourage additional savings in Roth and taxable accounts. With greater flexibility and a more forgiving tax code on dividends and capital gains (at least currently), you will find retirement cash flow much more tax efficient.
4 – MYTH: My pension does not impact how I should save or invest
As an estimate, one out of seven of our clients has a pension of some type. As companies and governmental bodies have modified their retirement benefits, we believe that number will continue to shrink. Even small pensions create a considerable planning opportunity allowing a more conservative or aggressive portfolio allocation with other saved funds, depending on your position. We see this clearly when we model retirement income projections for our clients; any type of guaranteed fixed income will strengthen your plan and consequently allow you to take more risk or possibly de-risk your investment allocation.
5 – MYTH: Tax deferral is always a good idea
We find more misconceptions about retirement savings tax treatment than in any other area. Our belief is that so much focus is placed on tax minimization that people often make short-term decisions that they eventually pay for many times over in the future. Tax deferral is one of these decisions. Anyone can purchase an investment through an insurance company that provides deferral of income taxes. At its core, this seems like a good move, and over several years, issues rarely arise. The problem arises if this deferred tax is never addressed. The IRS requires that these investments are taxed LIFO (Last-In, First-Out). Simply, all the growth of the investment must be taxed before you touch your principal. People using these accounts to draw from during retirement often pay tax on every dollar they draw. The decision to save in the short run is punished in the long run. Fortunately, there are usually creative strategies that can be used to address this issue with clients.
6 – MYTH: A budget including savings will make you feel restricted
A good budget should be liberating. Wait, what? Yes, you heard correctly. The biggest issue we see with budgets is that they are far too detailed and thus impossible to live up to. Much like a person who tries to lose 30 pounds in a month, the likelihood of success is quite low because they have created an impossible goal, one that allows little to no leniency. A good budget should start by encouraging key behaviors, which will soon turn into habits: taking cash out at the beginning of the week and not using credit cards, monthly deposits to retirement accounts, creating an annual travel budget with funding, etc. A good budget will relieve anxiety about your financial decisions because it is based on, and contributes to, the long-term success of your financial plan.
7 – MYTH: It’s too late to make a difference
People can make remarkable progress in their financial plans in just a few years. The important thing is to start! So much of financial planning is psychological and training yourself to engage in beneficial behaviors. Even simple tasks like establishing a working and retirement budget can make a massive impact on your long-term plan success. Better to start now than never.
The overriding theme of all the above misconceptions is to not assume anything you hear or read applies to everyone. Blogs, radio shows, and financial publications mostly do a nice job of giving general, factual advice, but too often people take this guidance as universally applicable. It is not. Our job is to tailor your plan around you; there is only one of you and there is only one plan appropriate for you.
Do you need help setting up or understanding your retirement plan? Start the conversation at ballastplan.com.
Ballast, Inc. is a registered investment adviser with the SEC. Registration with the SEC does not indicate that the adviser has achieved a particular level of skill or ability, nor is it an endorsement by the SEC. All investment strategies have the potential for profit and loss. Ballast, Inc. is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation.