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     In part two of this article, we delve into the remaining three myths or misconceptions about retirement planning. In part one we covered these three: 1. I’ll Pay Less in Retirement, 2. Blanket Advice is Good Advice, and 3. I’ll Need Less in Retirement. To read that article first, click here.

#4 Annuities are Bad—Misconceptions vs. Reality 

     Here is the myth; some investment vehicles are ‘bad’ while others are ‘good’ (refer to misconception #2 from part one of this article). Financial instruments on their own are not inherently good or bad. Each option has the potential for its own pros and cons. What’s more important is understanding what financial vehicle you are considering and how it works when weighed against your personal financial needs and goals.

    Annuities are an insurance strategy designed to provide its owner with a higher measure of security for the assets allocated toward that investment vehicle. The objectives annuities are commonly utilized for are principal protection, guaranteeing an income stream for the owner, having options for leaving money to your beneficiaries, and, in some cases optimizing to help pay for long-term care expenses. The specific product you are looking at may or may not be appropriate depending on which of those objectives are your own. 

     What had been common with annuities in decades past was that the price tag for any or all of the benefits listed above was extremely high compared to traditional investment vehicles. While that is still true of many “variable” annuities still offered today, the fixed and indexed style of annuities are generally priced in line with internal mutual fund expenses and do not have broker fees. We find that many people desire the security annuities can provide and that they would like to have them as part of their retirement plan—the annuity being, not the whole plan, but simply a component of a balanced plan. Such a plan takes into consideration factors like a household’s own needs, goals, risk tolerances, and objectives. 

     This is why it’s vital to evaluate the potential value (or lack thereof) an annuity could provide alongside all of your assets and investment strategies and weigh it against these factors. This type of full-scale retirement plan review is a service we provide to those we work with. 

#5 I Must Have $______ Saved to Retire

     No matter what number you fill in the blank above with, it’s probably going to be wrong. Here is why: being able to retire isn’t about achieving some arbitrary savings goal; it’s about having enough income to maintain your desired lifestyle in retirement. In other words, how much you need saved to retire is driven by how much income you need while retired, not the other way around.

     Again, this myth underscores the need to understand your expenses and what will change with your expenses when retired. Another reason for this misconception is most are unaware of ways to carefully craft their retirement income so as to make the most of the money saved. Often it has less to do with how much one has saved and more to do with how to utilize the funds already saved. Many are surprised to learn they can get significantly more out of their retirement savings over the remainder of their life. Are you starting to see why we use the word “plan” so often?

#6 I Should Only Retire When My Mortgage is Paid Off

    Pre-retirees are generally hesitant to carry debt into retirement, and for some, there may be a powerful argument to support this. However, the leverage can pay off if you have an attractive interest rate. If downsizing, buying your new home with cash, or prepaying the loan on your current home, weigh the benefits of being debt-free with the prospect of not having cash available for other purposes. One such purpose that can provide more pros than cons is adding to your investment portfolio. If your investment return expectation is greater than your mortgage interest rate, it may be advantageous to invest the cash, service your loan on your normal payment schedule, and come out at a net gain.

    Other considerations include: 

  • How long you plan to live in the home
  • Additional cash needs you foresee
  • Where cash will come from in the future to replenish savings 
  • Other financial resources you may have to bridge the gap if needed

    Remember, everyone needs liquid assets, and that flexibility is worth something.

     These are only a handful of common retirement myths we regularly hear in our practice. Please take the time to consider all of your circumstances while planning for retirement. If you decide to work with a professional to assist you, choose a trusted fiduciary financial professional. Fiduciaries are bound by oath to put your interests ahead of their own. If you have any questions or would like to begin designing your retirement income plan, please visit our complimentary consultation page or give us a call at 866-360-2724.

The first step toward achieving your retirement goals is having a plan…