7 counterintuitive retirement strategies
There are many ways to implement a successful retirement strategy. One way is to carefully map out a sensible financial plan and follow it through good times and bad. Another is to just improvise, using intuition and gut feelings, and hope for the best.
While there appears to be no competition between these two courses of action, 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 right ways of thinking and approaches.
Main advantages
· Some common misconceptions about retirement planning include inactivity: procrastinating until you get older or relying entirely on Social Security benefits.
· Some investment myths have to do with asset retention: the idea that long-term investments are dangerous, that you can’t sell and buy back a security, and that losses on paper 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 security
The Mistake
You must be constantly in and out of stocks, controlling the market. A buy and hold strategy is ultimately a losing strategy.
The reality
Since 1957, the S&P 500 index has yielded an average of 10.13% per year (with dividends reinvested). Adjusted for inflation, the return is around 6.34% per year. In the last 10 years, the index has returned 10.97% per year after accounting for inflation. Stocks typically outperform inflation over time and, despite some downturns, their value has slowly increased and is likely to continue to rise.
Of course, this doesn’t just mean finance and forget. You (or your financial advisor) should periodically monitor your portfolio and its performance.
Myth 2: Paper losses are not real
The Mistake
If I don’t sell a losing position, I won’t make a loss.
The reality
This is complete nonsense. You are losing money on a declining stock or other security, whether you actually sell it or not. You will not be able to claim a loss on your tax return if you do not divest, but the difference between realized and recognized losses is for tax purposes only. Your actual loss is the same regardless of what is or is not recognized on your income tax return.
Myth 3: Leave it to the professionals
The Mistake
You can just let the money managers handle it.
The reality
While professional portfolio management is a smart choice in many cases, you still need to be personally involved in managing your finances. It is normal to delegate market trading and day-to-day decisions to a professional, but do not leave the overall course of your finances entirely in the hands of your broker or banker.
Myth 4: Wait a minute
The Mistake
Don’t sell an investment and then buy it back. Instead, just hold.
The reality
As mentioned earlier, you can (and probably should) sell a depressed share and declare a capital loss before the end of the year to get a tax deduction . It’s no use waiting. If the asset recovers, you can dive again.
However, just make sure you don’t buy an identical stock 30 days before or 30 days after the original sells date. Repurchasing during this period will trigger the flush sell rule and cause your capital loss claim to be void. If you have already made this mistake and submitted your return, you must submit a corrected return immediately.
Myth 5: Social Security solves everything
The Mistake
Social Security benefits support me through my retirement years.
The reality
To dream. The average monthly Social Security payout was $1,503 as of January 2020. Of course, this varies, and some people receive up to $3,895 depending on their age and lifetime earnings. But, as the government will tell you, Social Security was never intended to be the only source of income for people when they retired. For average earners, Social Security accounts for about 40% of their pre-retirement income.
The end result is that Social Security pays, at best, a basic subsistence income and will certainly not provide you with any kind of comfortable living. It may cover rent or a mortgage payment and utilities, but the rest will likely be up to you.
Don’t count on Uncle Sam to meet all your retirement needs. Especially given ongoing concerns that Social Security could be insolvent by 2035 given changing demographics that have expenses exceeding income received.
Myth 6: Play it safe
The Mistake
I must put all my retirement money into totally safe, income-oriented investments, especially after I stop working.
The reality
Not necessarily. Obviously, low-risk vehicles are a priority at this stage of your life. Still, most retirees must have at least a small portion of their savings allocated to growth and stocks in some way, whether 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 without market risk can sustain you through your retirement years.
Myth 7: Put it off until tomorrow
The Mistake
Retirement is a long way off, so I won’t have to worry about that for a long time.
The reality
This is perhaps the most dangerous myth of all. You will be poor and dependent on relatives if you don’t control this, NOW. It will take some time for your investments to grow to the point necessary to support you through your years without work. If you don’t start saving as soon as you start earning, even if you’re in your twenties, you won’t have that time.
Posted by: John Labunski
