Many Americans, through no fault of their own, simply cannot save for retirement. The financial strains and limited opportunities for some people really make saving money for the future almost impossible as each day is a financial struggle. In fact, this is exactly why the United States needs systems like Social Security, Medicaid, and Medicare. However, for those that can save for retirement, financial misconceptions often create additional hurdles to jump over on the way to a financially secure future. So let’s take a look at three common retirement planning misconceptions.
Misconception # 1 – Keep Buying More Bonds As You Age:
Asset allocation decisions are incredibly important for both wealth generation and wealth preservation. The out-of-date rule of thumb used to say that you should take the number 100 and subtract your age in order to determine the correct stock to bond investment allocation in your portfolio. This is often referred to as your “glide path.” This rule of thumb glide path approach would have the individual investor buying more and more bonds over time while reducing his or her exposure to stocks. However, the reality is that the decision is not that simple, especially in retirement. In reality, your asset allocation really depends upon your goals, risk tolerance, and risk capacity. The general notion of getting more and more conservative over time with your investments is an outdated and incorrect notion. In fact, in 2007, David Blanchett’s “Dynamic Allocation Strategies for Distribution Portfolios: Determining the Optimal Distribution Glide Path” in the Journal of Financial Planning, which won the 2007 Financial Frontiers Awards Competition, showed that a fixed or constant asset allocation model can be more advantageous than a typical glide path model which reduces the allocation to equities over time. Additionally, other research has suggested that the best strategy is to lower your allocation to equities as you approach and move into retirement and then increase the equity allocation as retirement progresses. So, while decreasing your stocks over time is not always a bad idea as you do want to decrease your stock exposure right around retirement, but the notion it should continue throughout your retirement is a real misconception for many Americans.
Misconception # 2 – If My Advisor Is A Fiduciary Everything Is Golden:
While not all financial advisors are legally required to act as a fiduciary, a new Department of Labor rule will require most retirement advisors to do so. The core concepts of the fiduciary standard is to act in the best interest of the client, minimize conflicts of interest, and charge no more than a reasonable fee. This sounds like a great thing, especially when you are relying on that person to provide you with sound and reliable advice. However, you need to know more about your advisor than just if he or she operates as a fiduciary. You need to know about how your advisor is compensated, their education and credentials, and if they have any serious conflicts of interest. In fact, you need to ask these questions because in some situations a fiduciary advisor will not be the best advisor for you. For example, the sale of annuities, life insurance, car insurance, or other types of risk management techniques are often performed by specialists that are not required by law to act as a fiduciary. But remember, just because someone is not required by law to act as a fiduciary does not mean they will not do what is in your best interest.
Many advisors openly disclose their compensation, but if it is not clear ask about their fees and how they are compensated. Fiduciaries are held to a more onerous standard of care so their liability is also higher, often making a fiduciary advisor a more expensive option. The higher cost of a fiduciary is often cited as a reason against the expansion of the Department of Labor’s fiduciary standard. Many people fear that it will further alienate Middle America from receiving any advice since they will be unwilling or unable to afford the higher cost of fiduciary advice. Additionally, fees between fiduciary advisors can range significantly so make sure you compare fees. Also, remember it is incredibly important to understand the fees you are paying and the value you are getting for your fees. Just lowest cost or highest cost is not enough to know. Ask your advisor about their value and what they will do for you. Additionally, look for quality education credentials when picking a financial advisor. Qualified marks like the CFP®, CFA, ChFC®, and RICP® indicate a certain level of education and experience.