No matter how many years you are from retirement, it's
essential to have some kind of game plan in place for financing it. With
today's longer life expectancies, retirement can last 25 years or more, and
counting on Social Security or a company pension to cover all your retirement
income needs isn't a strategy you really want to rely on. As you put a plan
together, watch out for these common myths.
Myth No. 1: I can postpone saving now and make it up later
Reality: This is very hard to do. If you wait until--fill in
the blank--you buy a new car, the kids are in college, you've paid off your own
student loans, your business is off the ground, or you've remodeled your
kitchen, you might never have the money to save for retirement. Bottom line--at
every stage of your life, there will be competing financial needs. Don't make
the mistake of thinking it will be easier to save for retirement in just a few
years. It won't.
Consider this: A 25 year old who saves $400 per month for
retirement until age 65 in a tax-deferred account earning 4% a year would have
$472,785 by age 65. By comparison, a 35 year old would have $277,620 by age 65,
a 45 year old would have $146,710, and a 55 year old would have $58,900.
Note: This is a
hypothetical example and is not intended to reflect the actual performance of
any specific investment.
Why such a difference? Compounding. Compounding is the
process by which earnings are reinvested back into a portfolio, and those
earnings may themselves earn returns, then those returns may earn returns, and
so on. The key is to allow enough time for compounding to go to work--thus the
importance of starting to save early.
Now, is it likely that a 25 year old will be able to save
for retirement month after month for 40 straight years? Probably not. There are
times when saving for retirement will likely need to take a back seat--for
example, if you're between jobs, at home caring for children, or amassing funds
for a down payment on a home. However, by starting to save for retirement
early, not only do you put yourself in the best possible position to take
advantage of compounding, but you get into the retirement mindset, which
hopefully makes you more likely to resume contributions as soon as you can.
Myth No. 2: A retirement target date fund puts me on
investment autopilot
Reality: Not necessarily. Retirement target date mutual
funds--funds that automatically adjust to a more conservative asset mix as you
approach retirement and the fund's target date--are appealing to retirement
investors because the fund assumes the job of reallocating the asset mix over
time. But these funds can vary quite a bit. Even funds with the same target
date can vary in their exposure to stocks.
If you decide to invest in a retirement target date fund,
make sure you understand the fund's "glide path," which refers to how
the asset allocation will change over time, including when it turns the most
conservative. You should also compare fees among similar target date funds.
Myth No. 3: I should invest primarily in bonds rather than
stocks as I get older
Reality: Not necessarily. A common guideline is to subtract
your age from 100 to determine the percentage of stocks you should have in your
portfolio, with the remainder in bonds and cash alternatives. But this strategy
may need some updating for two reasons. One, with more retirements lasting 25
years or longer, your savings could be threatened by years of inflation. Though
inflation is relatively low right now, it's possible that it may get worse in
coming years, and historically, stocks have had a better chance than bonds of
beating inflation over the long term (though keep in mind that past performance
is no guarantee of future results). And two, because interest rates are bound
to rise eventually, bond prices could be threatened since they tend to move in
the opposite direction from interest rates.
Myth No. 4: I will need much less income in retirement
Reality: Maybe, but it might be a mistake to count on it. In
fact, in the early years of retirement, you may find that you spend just as
much money, or maybe more, than when you were working, especially if you are
still paying a mortgage and possibly other loans like auto or college-related
loans.
Even if you pay off your mortgage and other loans, you'll
still be on the hook for utilities, property maintenance and insurance,
property taxes, federal (and maybe state) income taxes, and other insurance
costs, along with food, transportation, and miscellaneous personal items. Wild
card expenses during retirement--meaning they can vary dramatically from person
to person--include travel/leisure costs, health-care costs, financial help for
adult children, and expenses related to grandchildren. Because spending habits
in retirement can vary widely, it's a good idea as you approach retirement to
analyze what expenses you expect to have when you retire.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with a qualified tax advisor.
Securities offered through LPL Financial, Member FINRA/SIPC
