3 Investing Myths That Can Ruin Your Retirement
A good friend of mine loves to cite this quote often attributed to Mark Twain: “It’s not what you know for sure that gets you in trouble. It’s what you know for sure that just ain’t so.”
Retirement saving and investing are similar. It’s easy to fall into retirement strategy beliefs that “seem” to be true. Be sure not to fall victim to the following myths about retirement.
Myth #1: When it comes to investing for retirement, investment choice is more important than how much money you invest.
A whopping 66% of 1,000 people recently surveyed believe that what you are invested in (stocks, bonds, mutual funds) is more important than how much you invest.
While investment choices are very important, the amount you’re able to save has the greatest impact on your retirement success.
A diversified portfolio with an asset allocation appropriate for your risk tolerance and time horizon does matter. But if you’re not saving enough, even the best investment won’t help you achieve a successful retirement.
The chart below shows how saving more adds up over time. The portfolios with higher deferral rates can result in a larger balance, even when the asset allocation is more conservative.
Assumptions: Starting annual salary of 50,000 increased each year at 3%. Annual contributions: Either 6% or 10% of salary. 10 year real returns: 2007-2016. Rate of return is based on historical annual returns of S&P 500 Index and Lehman Brothers Aggregate Bond Index, with annual rebalancing. Contributions not to exceed IRS 2017 limit of $18,000. This example is for illustrative purposes only and is not meant to represent the performance of any specific investment option.
When does the investment choice make a significant difference? When it’s extreme. For example, a young investor may think he’s playing it safe by investing primarily in cash. Or a retiree, who is spending from her portfolio, may be invested too aggressively without shock absorbers.
Myth #2: A 50 year old shouldn’t put any of his or her retirement money in stocks, because stocks can lose money.
Sure, stocks can lose value, but they also generate the highest growth potential over the long term. Having all your investments in cash (or under your mattress) won’t keep pace with inflation. Bonds play an important part in your portfolio and tend to be the least understood by investors.
It’s important to have a balance of stock and bond investments that can address different risks and, at the same time, provide growth potential and help sustain a retirement that could last decades. While bonds help to dampen the short-term swings in a portfolio, stocks provide the long-term growth potential needed to keep pace with inflation and help your money last throughout retirement.
Asset allocation by age
In evaluating equity exposure, consider other assets, income, and investments (e.g., equity in a home, Social Security benefits, individual retirement plan investments, savings accounts, and interests in other qualified and non-qualified plans) in addition to interests in a particular plan or IRA. The allocation pie chart above is age-based only and does not account for your personal circumstances.
Myth #3: Saving 6% of your income toward retirement each year will give you enough money to retire at age 65.
That’s probably not enough.
For most of us, retirement will be funded by Social Security benefits and our personal savings. We recommend saving at least 15% of your salary (including any employer contributions) in order for those savings to carry you through a retirement that could last decades.