(This article was adapted from Retiring for the GENIUS by Marc S. Freedman.)
Some myths become legend, and once they reach that level of status, it’s tough to shake them from their perch. The world of retirement planning is no different. These are five myths that still exist in retirement planning:
1. Don’t touch the principal — live off the interest. It’s been more than two decades since retirees could comfortably consider retiring off the interest they earned at the bank.
Today, you need to take a more sophisticated look at your overall financial life. If not, you’ll find yourself living a life of scarcity when your retirement life could be filled with abundance.
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Consider taking a total-return approach as a mechanism for creating an income stream. Essentially, that means building an investment portfolio that leaves roughly 5 to 8 percent of your investable assets in cash. Once a month, you have a check for a predetermined amount electronically withdrawn from the cash account and deposited into your checking account. As the cash portion of your portfolio depletes to 3 to 5 percent of the value, you rebalance the portfolio and replenish the cash account.
2. The more a financial plan weighs, the more valuable it is. When my father first started in the financial planning business, he joked that financial planning was delivered by the pound. Financial institutions would battle over who had the most attractive, heaviest, most premium leather binder to provide a client. But in truth, most pages were boilerplate filler.
Today’s financial plans are living documents. Generally, they are introduced with a three- to five-page executive summary that highlights your strengths, weaknesses, opportunities and threats. The report is supplemented with eight to 12 pages of high-level analysis and reports. The last page features an “action plan” that lists steps you should consider taking to better position yourself for retirement success.
All this data is then made available through a cloud-based software system where you (and, if necessary, your adviser) can monitor the progress of your plan and keep you on track.
3. My life is simple and I have a will — that’s all I need. I’m always amazed by how unprepared people are when a loved one (especially a spouse or parent) passes away. Without proper planning, the days following a death can be disastrous and not the way the deceased had planned.
No, I’m not talking about the division of assets and who inherits which jewelry. It starts with someone, other than the deceased, knowing where instructions are pertaining to the funeral, cemetery and final wishes.
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Many people elect to keep end-of-life instructions in a safe deposit box. Yet if you haven’t given anybody instructions on where to find the key and/or who has authority to open the box, your wishes may not be fulfilled.
No matter how simple a life you lead, or how basic you’d like your funeral to be, it’s important that your instructions be clearly noted and that someone knows where those notes exist. Finally, I recommend having your personally written wishes notarized.
4. A surviving spouse will honor the way the deceased spouse managed money. With you gone, your spouse’s life will change. For a short time, your spouse may wonder, “What would Irving do?” or “How did Sylvia handle all the bills?” but soon that will fade. A surviving spouse’s life adapts and changes to the new environment.
What’s even scarier is the thought that your spouse never learned how to handle the checkbook, pay bills, purchase a car, upgrade cell phone plans, make decisions on extended warranties or plan a vacation.
Make certain that you are both familiar with day-to-day money management skills, or build a relationship with someone to serve as a trusted adviser for the surviving spouse who you fell will place your interests first.
5. When I retire, I need to dramatically shift my investment portfolio away from stocks and into bonds. You’ve probably heard the myth: “Invest your age in bonds and the rest in stocks.” The truth is, everyone’s personal financial situation is unique. You may need to increase your stock allocation in retirement, especially if the bulk of your retirement income comes from non-inflation-protected pensions.
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More importantly, you should view your overall investment allocation by including all your investable assets. This might include money in the bank, annuities, the cash value of life insurance, personal investments, retirement accounts — and, yes, even the present value of your pension and Social Security.
With all this data, now you can build an asset allocation that truly reflects your retirement income needs.
This article is adapted from Retiring for the GENIUS, by Marc S. Freedman, published by For the GENIUS Press. Follow Marc on Twitter @retiringgenius.