Busting Common Retirement Myths

A financial plan consists of many topics, but one of the main focal points is retirement. Having worked as a financial planner for over seven years, I’ve picked up anecdotal and experiential observations that shed light on some of the common retirement myths and misconceptions I’ve noticed over my career.

Myth #1: Working An Additional Year Will Make a Big Difference

One of the most important assumptions in a retirement projection is the age or year in which a person retires. It’s common for clients to ask for multiple scenarios in order to compare how changing their retirement date impacts the plan. The truth is, one or two years in either direction will not make a huge difference. While the additional retirement contributions, delayed withdrawals, and potential increase to Social Security benefits will provide a positive impact, they won’t move the needle in a meaningful way. The cake is already baked. Much of the most impactful work is done early in one’s career. That’s why we preach to save early and often!

Instead, the factor to keep an eye on is market performance in the final years leading up to, and initial years of, retirement. The formal name for this is sequence of returns risk. For some, significant market declines during the beginning years of retirement can derail even the best of plans. As a reminder, if your portfolio drops 30% in one year and rebounds with a 30% return the next, you’re still not back to even. One way to hedge against this risk is to allocate accordingly and have 2-3 years of cash needs in a safe and liquid investment.

Myth #2: Retirement is One of the Best Times of Your Life

If you’re anything like me, you sometimes daydream about being retired. The promised land of retirement is a motivator for many, but what if I told you that instead of excitement and anticipation, some people feel fear and unsatisfaction?

Retirement is a huge life change. Many people associate purpose with their job, have a social life that is closely tied to work, and have been in a routine for decades. Closing that chapter can be difficult. For some folks, it’s tough to fill up a nine-hour block with meaningful activities, day in and day out. In the same way that you must prepare financially, you must also prepare mentally for a happy, fulfilling retirement. Take up hobbies, keep a circle of friends, maintain good health, volunteer, and develop a new routine. Retirement can embody the best years of your life - if you are intentional about it.

Myth #3: You Can Never Save Too Much for Retirement

It’s hard to imagine that someone could possess too much money, but depending on lifestyle standards, it’s possible that one could amass more money than they will ever need. One common archetype is the lifelong super saver. This person is frugal, lives a low-key lifestyle, works longer than necessary, and has difficulty transitioning from being a saver to a spender.

If you think you may end up in this situation, it’s important to think about opportunity costs. The opportunity cost of saving too much for retirement is not getting to spend and enjoy your younger years as much. Even so, it’s hard to know how much is enough. Luckily, the job of a financial planner is to determine the appropriate split between what should be saved for later and what can be enjoyed here and now.

Conclusion

As you prepare for retirement, whether that’s in 25 years or two months, it’s important to keep your eye on what’s important. Develop strong habits (but not too strong!) early on for optionality that works in your favor. Aim to craft the perfect blend of saving for tomorrow while enjoying today. Lastly, don’t skip out on the mental prep needed for a happy retirement.

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