If you succumb to any common financial and investing myths, you could see some of your money and potential future wealth go up in smoke.
Myths, in the sense of false beliefs, are like the Twinkies of ideas. They aren’t good for you and seem to last forever. And, sometimes, they are perpetuated by those who can benefit most from their longevity.
Take cigarettes. We’ve known for a long time smoking is bad for your health. Except for the fact smoking helps you lose weight by suppressing your appetite.
I hope you didn’t fall for that one. It’s not true. Researchers have debunked that myth, finding that quitting smoking actually helps you lose weight. Though the myth probably won’t go away anytime soon, because it was created for a particular purpose: to sell cigarettes.
The appetite suppression myth was the brainchild of ad men who, at the behest of cigarette makers, wanted to attract female smokers in the 1930s. So, they began to associate smoking with things like health and beauty. For example, an advertisement placed in women’s magazines by Lucky Strike urged women to “reach for a Lucky instead of a sweet.” By the 1960s, tobacco giant Philip Morris was selling Virginia Slims, thin and light cigarettes that literally embodied the myth that smoking could help you achieve a slimmer figure.
The finance industry has its own set of persistent myths. Knowing the truth behind these myths can help you make better financial decisions and increase the odds of reaching your financial goals.
Myth #1: Expensive means better
Reality: A high price tag doesn’t always equate to high quality. From generic drugs to store-brand groceries, there are many low-cost products that are of equal quality to their more expensive counterparts.
The same is true with investments. When you factor in costs, expensive investments tend to underperform cheaper ones. That’s because they have larger costs to overcome before providing a positive return to investors. Some investment companies though would like investors to buy into the myth, explaining that high costs are necessary to produce great results.
Simple logic proves otherwise. Remember, the more you pay in investment fees, the less of your return you get to keep. And, that’s less money you have in your portfolio compounding and building wealth. As an investor, it’s better to follow a low-cost investment strategy.
Myth #2: All financial advisers are the same
Reality: Anyone may call themselves a financial adviser, financial planner, wealth manager or just about any other title. This can make it difficult to determine how well you can trust someone with your money. Not all advisers are what is called a fiduciary, which means those providing financial services are legally obligated to act in the best interests of their clients.
Knowing if the company or person you’re working with is a fiduciary comes down to how they’re registered. Registered investment advisors (“RIAs”) are regulated under the Investment Advisers Act of 1940, which binds them to the fiduciary standard. Fiduciary is the highest legal standard to reach. It is a higher standard than the “suitability” standard that is followed by registered representatives, such as stockbrokers.
Therefore, you should be aware that the advice you receive from one adviser to the next can differ depending on how they are registered.
Myth #3: You should spend 4% annually in retirement
Reality: A common retirement rule of thumb is the so-called “4% rule.” It suggests that if you withdraw 4% from your portfolio in your first year of retirement and then adjust that percentage annually for inflation, you can avoid running out of money for the next 30 years.
While the 4% rule is a good starting point, there are reasons why it shouldn’t be considered a steadfast rule. For one, overall expenses typically decline in retirement, so a yearly inflation adjustment is unnecessary. Also, it’s detached from your personal situation, which could change at any time in retirement. For you, a higher or lower withdrawal rate may be appropriate.
Perhaps a better rule to follow is to have a flexible withdrawal rate, spending more when times are good and less when times are bad. That way you’re better able to adjust as your life and markets change.
Myth #4: Age 70 is the best age to collect Social Security
Reality: Individuals can file for Social Security as early as age 62 and receive a reduced benefit or wait and receive a bigger benefit. By age 70, the maximum benefit is reached, approximately 75% greater than the early benefit at age 62. Because Social Security is a primary source of income for most people, discussions about the program typically focus on delaying or “maximizing your benefit.”
But, there are many more factors to take into consideration. Factors such as assets owned, work earnings, marital status, the death of a spouse and disability can greatly impact your benefit and claiming strategies. If you want to retire early, for example, you may want to consider taking it right away so as not to draw down too much of your savings. Your health is an important factor, too. What good is forgoing your benefit if you may not live long enough to enjoy the larger benefit?
Ultimately, there is no single “best age.” What works best for you depends on your personal situation.
Myth #5: It’s too late to save for retirement
Reality: If you have little saved for retirement by the age of 50, all hope is not lost. You may have to accept the reality of working longer or adjusting your desired retirement lifestyle. But, retirement is still within reach.
At age 50, you qualify for catch-up contributions, an extra amount that you’re legally allowed to contribute into your retirement accounts. You can save up to an additional $6,000 (for a total of $24,500 in 2018) in an employer-sponsored plan and up to an additional $1,000 (for a total of $6,500 in 2018) in a Traditional or Roth IRA. Someone who starts saving at age 50 by maximizing their 401(k) with catch-up contributions can amass over $1.3 million by age 70 (assuming an 8% annual return), according to research by the American Association of Individual Investors. Even saving just $1,000 a month can net you over $650,000 in your nest egg.
Of course, that’s no excuse to wait. A savings target of $24,500 per year for anyone is a lofty goal. It will require finding ways to reduce expenses, save more and/or boost your income.
Myth #6: You should sell and get out during a down market
Reality: During a down market, some people may consider selling their investments out of fear of losing money. That would be a mistake. Historically, financial markets have always recovered. If you sell at the wrong time, you could end up locking in your losses. Instead, take a deep breath and remember these three words: this is normal. A market decline is actually the time to buy, as investments can be purchased at a bargain and you can reap the potential gains. As Warren Buffett famously said: “Be fearful when others are greedy and greedy when others are fearful.”
Myth #7: Not everyone needs an estate plan
Reality: A common misconception about estate planning is that it’s only necessary for the rich. The truth is estate planning can benefit everyone, regardless of level of wealth. The size of your estate, be it a single bank account or home, does not matter. An estate plan makes sure what you do have goes to the right person or organization. Further, it ensures the right decisions are made on your behalf and your wishes are fulfilled. Without an estate plan, you could leave your family unprepared for the inevitable.
Myth #8: You can eat for free
Reality: A popular phrase in the finance industry is “there’s no free lunch.” To invest and build wealth, you have to take on risk and you have to pay (investment fees, 401(k) fees, adviser fees, etc.).
However, some financial products are heavily marketed on TV and in the news, such as precious metals and annuities, that make it sound as if you can have your cake and eat it too. They seem to imply guaranteed gains. Or, they fail to mention that certain attractive features like lifelong income payments come with high added fees. When considering a financial product, always do your homework.
Myth #9: Financial planning is all about money
Reality: The focus of your financial plan should be the answer to the question: What are you saving and investing for? Financial planning is really about managing your money in a way to allow you to live life how you want.
This is especially so when planning for retirement. You may have big dreams, such as traveling or writing a book, but they might not be enough to keep you busy. How are you going to replace those 40-50 hours per week that you currently spend working? Because of rising life expectancy, you can reasonably expect retirement to last 20-30 years. That’s a lot of free time. You don’t want to make the mistake of spending money frivolously to find out what makes you happy in retirement.