As financial planners, we hear all kinds of thoughts that people have about retirement. The fact is that no two people are the same and neither are two retirement scenarios. Your neighbor may plan on spending a whole winter in warm weather and you may prefer to stay near your children and grandchildren. There isn’t a right or wrong way to do retirement, but it is important to plan properly to make your ideal retirement happen. Let’s break down some of the common misunderstandings about retirement.
Myth # 1 - I need $1,000,000 to retire
You may need 1 million, 2 million, 10 million or perhaps you can retire on far less. It really is relative to what you need monthly to make your world go around. Let’s reframe this scenario and completely take a dollar amount out of the equation. You will need a certain amount per month to pay all your bills and pay for the extras you desire. If the mix of income, market growth, inflation, and distributions you have will provide what you need per month, you may be able to retire.
Let’s say Jeff and Sharon are 65 and 67. They do not have a million dollars saved. They own their home and have paid off their mortgage and have no debt. They have normal bills such as utilities, insurance, home maintenance, and taxes. Additionally, they spend money on gas, groceries, gifts and other discretionary spending.
Both Jeff and Sharon receive Social Security and Sharon has a teacher’s pension. These 3 sources of income pay for most of their expenses, but they do have other expenses that it doesn’t cover. They both have IRAs, and they have some money in accounts at their local bank. They withdraw a small amount from their IRAs to cover expenses that Social Security and pension does not cover. They work with their advisor to make sure they do not take too much money out of their IRAs, putting their portfolio in danger of running dry. Since their IRAs are invested, they see modest long-term growth that will allow them to increase their draw in the future as inflation increases their income need. This works well for them.
A solid financial plan and an experienced advisor will help you to determine what you need to save, how much you need to accumulate and help you manage investments and plan out how to start to spend your money.
Myth # 2 - I don’t have enough money saved to hire an advisor
While there are some firms that require a certain level of wealth, many, like ours do not. We believe that having an advisor at all levels of wealth will put you on the right path to accomplishing your goals. If you wait until you feel your portfolio is large enough, you may not have enough time to change the path of your strategy. It is far better to seek help earlier in the game so that you can determine what is appropriate for your situation and what you will need to do to get there.
Myth # 3 - My employer manages my 401k
Nope, nope, nope…this is absolutely false. In fact, your employer cannot manage your 401k. Your employer is responsible for choosing suitable options for employees to invest in and getting the contributions into the plan, but they are not choosing what you personally are investing in or managing it for you. You will decide how much you’d like to contribute and what to invest in. There may be an investment person that will help you fill out the paperwork to enroll, but they won’t automatically make changes to your account through the years. Because a 401k plan sponsor (your employer) has a fiduciary responsibility to provide a suitable plan, many have included Target Date Funds or Lifestyle Funds to help investors select something suitable, but these are not personalized portfolios. Some financial advisors will help their clients oversee their retirement plans and adjust their strategy as they get closer to retirement. Some people may even decide to move a portion of their investments to IRAs as retirement approaches for a more hands-on approach to management.
Myth # 4 - I should contribute all my savings in my pre-tax 401k to save on my taxes
It is by no means wrong to save as much as you can afford in your pre-tax 401k, but it may not be the most tax efficient way to do things. In fact, you may want to include investments that are not in your 401k plan. Having different “buckets” of money that will be taxed differently will allow you to control tax in retirement and gives added flexibility to a retirement plan. You will however want to make sure that you continue to save enough in your 401k that you pick up any match that you are eligible for.
Roth-401k - Many employers are offering Roth 401k as a supplement to the traditional pre-tax 401k. With Roth 401k you can use after tax dollars to fund the same employer sponsored plan. You won’t get a tax break this year, but you can take it out later without paying tax.
Roth IRA - These work in a similar way as a Roth 401k; however, they are outside your employer’s plan. This puts you in the driver's seat when it comes to choosing the investments and allows for professional management. Again, you won’t get a tax break in the year you save it, but if you follow Roth IRA rules, you will be able to take it out tax free later. Please note that Roth IRAs are subject to income thresholds. Be sure to verify with your financial advisor or tax preparer that you are eligible to contribute.
Brokerage - Retirement savings do not need to be in a retirement account at all. You can use accounts such as brokerage accounts or even bank accounts that are funded with after tax money to fund your retirement. You will owe tax when dividends and interest are paid on investments and when investments are sold at a gain. It is possible to control taxes by offsetting capital gains with losses as well. Brokerage accounts do not have the age restrictions on them like retirement accounts do; this allows you flexibility with retirement age and can be very useful if you are planning to retire before age 59.5.
When you diversify your savings strategy, you also diversify your tax strategy which can pay off when it is time to start your spending strategy.
When considering what is fact and what is fiction when it comes to your retirement, it is important to know what facts apply to you. The perfect retirement is as individualized as you are. Working together with a trusted professional will help you to determine how you need to save, grow, and distribute the money you will need for your retirement.
Investment Advisor Representative
Rebecca joined the firm in 2011 as an Investment Advisor Representative. In this role, she works with clients to manage their investment assets and help them obtain their financial objectives. Rebecca brings a great deal of experience to the team having worked for several years at Marshall & IIsley Bank and MetLife. She earned a Masters of Business Administration degree (with an emphasis on finance) from Concordia University.
Advisors Management Group, Inc. is a registered investment adviser whose principal office is located in Wisconsin. Opinions expressed are those of AMG and are subject to change, not guaranteed, and should not be considered recommendations to buy or sell any security. Past performance is no guarantee of future returns, and investing involves multiple risks, including, but not limited to, the risk of permanent losses. Please do not send orders via e-mail as they are not binding and cannot be acted upon. Please be advised it remains the responsibility of our clients to inform AMG of any changes in their investment objectives and/or financial situation. This commentary is limited to the dissemination of general information pertaining to AMG’s investment advisory/management services. Any subsequent, direct communication by AMG with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon request.