There’s no bones about it, retirement planning is hard. Many people don’t even have enough money to save for retirement and instead rely on government services like Social Security, Medicare and Medicaid. For those of us who do have the ways and means to save for retirement, we have to make a lot of decisions regarding our money and what to do with it. Unfortunately, there are some misconceptions when it comes to making retirement plans. These misconceptions can lead Americans to make mistakes with their money and miss out on some big opportunities. In the Forbes Magazine article, “3 Common Misconceptions About Retirement Planning,” Jamie Hopkins tries to clear up these false truths that far too many people believe.
Most Americans follow the old school glide path approach to managing their stock and bond ratio. This traditional approach to bond management has you gradually increasing your bond purchases in comparison to your stock holdings as you age. More current research shows that this approach doesn’t work for everyone. You should take a more individualized approach when determining your stock to bond ratio. Take into account your risk tolerance and risk capacity as well as your personal financial goals. One award winning study showed that a fixed strategy might be better than a glide path strategy. Yet another study found that it makes sense for some people to actually decrease their equities up to retirement and then gradually increase their allocation in bonds. The lesson to take from all of this research is that it’s wise not to follow the traditional glide path approach to stock and bond allocation without taking other factors into account as well.
The second major misconception listed in the article is that all you need to look for in a financial advisor is whether they are a fiduciary. Yes, a fiduciary is required by law to act in your best interest, keep conflicts of interest at a minimum and only charge you a fee that is deemed reasonable. That sounds promising, but you have to look farther into an advisor than simply whether or not they are a fiduciary. It’s crucial to know exactly how they are compensated and how much they are charging in fees. If that is not clear in your documents, be sure to specifically ask them. Also look closely at their education, credentials, and conflicts of interest. Even though an advisor is supposed to act in your best interest, especially if they are a fiduciary, it doesn’t mean that they necessarily will. The Department of Labor’s new fiduciary rule puts an added challenge on advisors selling certain types of annuities. While these regulations were meant to be in the best interest of clients, fiduciaries have to charge more because of the added liabilities they take on. When looking for an advisor, you need to consider whether they are a fiduciary as well as their compensation type, fees, education and credentials.
Finally, far too many people have the misconception that all annuities are bad. This just simply is not true and it’s a relief to see an article in Forbes Magazine acknowledging this fact. You could be doing your retirement a disservice by writing off annuities because they might be the best product for your retirement planning. Annuities come in many shapes and sizes. Some products start payments immediately, while others defer your payments until some point in the future. Annuity products can have a variable component where you receive market upside potential with some downside protection or they can pay a fixed interest rate. Some annuities pay you income payments for a set time frame, while others guarantee lifetime income payments. Before you decide that annuity products are not right for your retirement plan, do your research and weigh the benefits and drawbacks.
The Forbes article equates retirement planning with hitting a moving target in the wind, showing that while it’s tricky, it’s not impossible. Keep an open mind and realize that you might have to change your position and your planning along the way. Try not to follow old-fashioned advice or rules. Using a reputable financial advisor will help ensure that you are making decisions based on current research and your individual best interest. Ask for advisor recommendations from friends and family. Just don’t assume that the old rules or common advice will work for your personal retirement planning. When considering annuities and your stock to bond ratio, make decisions based on your personal goals and finances.
Written by Rachel Summit