posted on October 28th 2020 in LA/OC CFP Team Posts with 0 Comments /

As I work with more people to help them plan for retirement, I realize there are a lot of myths floating around about the planning process. Here are five of them — debunked.

Myth 1: A financial advisor will help me pick stocks to beat the market.

While investments are important, they’re only one slice of the pie when it comes to your financial health. A financial advisor should first and foremost be a fiduciary, someone who has your best interest in mind and works to integrate the five pillars of financial planning—retirement planning, investment management, tax planning, insurance planning, and estate planning—into your situation. 

An advisor should give you a real-time view of your cash flow and balance sheet, project your roadmap, give you advice on steering your finances, and ultimately come up with a diversified mix of investments to help you reach your goals but also sleep at night. In addition, he or she should know your goals, set appropriate expectations about the future, give you a heads up on things you are missing or should be aware of, and help you tackle any unexpected changes. 

Myth 2: I need to invest in dividend stocks so I can spend the dividends and keep the principal.

While this conceptually makes sense, it’s far from optimal given how low interest rates are; the average dividend yield of the largest companies in the U.S. is so low at of the time of this writing (versus a typical 4 percent withdrawal rate for a diversified portfolio). This type of thinking also undermines the importance of a diversified mix of stocks and bonds—to lower overall risk.

You can help avoid the headache of low rates and extreme market volatility by having a system in place, such as the bucket system, to provide income from various parts of your portfolio. Plus, set up a mix of stocks and bonds in low-cost funds that get rebalanced periodically, so you capture dividends and growth to provide income. 

Myth 3: My tax rate will be lower in retirement.

While that could happen, the reality is the bulk of most people’s savings is in the form of retirement accounts like 401(k)s and IRAs, which are taxable once you take out the money. During working years, many families have 401(k) contributions and itemized deductions, which greatly reduce taxable income, but in retirement, a lot of people take the brunt of taxes owed. 

Add to this scenario the potential for higher rates in the future, and there’s definitely a potential your taxes in retirement won’t be any less than your working years. They could even be higher. As a result, it’s vital to plan ahead, and diversify your tax strategy by making sure you save not just into a tax-deferred 401(k), but also consider a non-retirement account and a Roth IRA if possible. This strategy will help you better manage how you take income from your portfolio and give you more options to manage your taxes.

Myth 4: I can easily self-insure for a long-term care event. 

Consider the fact that people are living longer than ever, and the average long-term care (LTC) need is three years. If you need any type of assisted living or memory care, you are likely looking at $4K a month, in today’s dollars. Project that forward with inflation and it won’t be difficult to drain $500K in 5–10 years. Rather than play a game of chicken with your future healthcare costs, many folks under 65 need to consider buying LTC insurance. 

Even if you have millions of dollars saved, the potential liquidation burden on your assets, the potential tax impact, and the psychological impact for the family members caring for you is enough of a reason to warrant a LCT insurance policy. A LTC insurance specialist can show you how to build LTC insurance into your plan so it’s not an all or nothing approach

Myth 5: My situation is simple; when I pass away my family will equally split my assets. 

Most families require some form of estate planning; it’s not just for the super wealthy. Documents like an advanced healthcare directive, power of attorney, a will and a trust can be vital to avoid any major headaches. 

For instance, if you and your spouse own a home in California and both pass away without an estate plan, the situation gets complex—and expensive—right away. Your kids will have to go to probate court and pay legal fees as a percentage of the home’s value, which could add up quickly for a million dollar home. And what if you get sick or injured and become incapacitated? Will your spouse be able to get a refinance on the house or have the ability to act on your behalf? Be sure to be proactive and talk with an experienced estate planning attorney about your specific situation. 

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