27 Mar 2017

3 Retirement Myths

Three very popular myths about the “Rules of Retirement” were broken in an article in this monthly issue of Forbes. The article is written by Judith Ward, who is, in her own words, “a Senior Financial Planner and Vice President of T. Rowe Price Associates, Inc., and mom of two millennials”.

She starts her column by quoting 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.” Ms Ward uses the writer’s words to underline what we often assume to be true, it’s only myth.  According to her, “Retirement saving and investing are similar” and they have to be seen from a similar point of you. Then she outlined the 3 most common myths when it comes to retirement.

Myth #1: When it comes to investing for retirement, investment choice is more important than how much money you invest.

According to a recent survey, done by the investment company BlackRock, 66% of the 1000 participants believe that it’s not how much, but rather where you invest your money (stock, bonds or mutual funds). However, Ms Ward emphasised that at the end “the greatest impact” on the retirement plan is the amount of money put aside. Her advice is that despite that a retirement plan may look “more conservative” it usually ends up offering higher deferral rates and larger balance than a diversified portfolio with many allocations.

Myth #2: A 50-year-old shouldn’t put any of his or her retirement money in stocks, because stocks can lose money.

Having investments in cash only, or under the mattress won’t keep you safe from inflation, Ward continued in her article. Her advice is to put money in stocks and bond: “Sure, stocks can lose value, but they also generate the highest growth potential over the long term.” On the other hand, bonds, can play a crucial part in the retirement portfolio and are often underestimated. “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.”

Myth #3: Saving 6% of your income toward retirement each year will give you enough money to retire at age 65.

Unfortunately, Ward thinks that 6% is not enough. As it is with the majority of the people the pension is determined by the Social Service and personal savings. In times like now and with the uncertain financial future we are facing, the specialist advises to save up to 15% from the salary. At least, the ones who can afford it.

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