Let's Go Retirement Mythbusting
Quick question -- how many horns are on a Viking helmet?
If you answered two, you'd be wrong. The correct answer is zero.
Vikings didn't wear horned helmets. They also weren't noble-yet-brutal heathens who lived to terrify unfortunate peasants.
Our modern conception of these master seafarers is the result of romanticized 18th century myth making.
These myths are far from uncommon.
Remember how Thomas Edison invented the light bulb?
He actually just created a bulb that burned longer.
Remember how Marie Antoinette said "Let them eat cake" during the French Revolution?
That was really said by a different noblewoman decades before Marie's birth.
He wasn't short.
The Salem Witch Trials?
Nobody was burned at the stake.
History is riddled with such myths. Yet unless you teach grade school history -- or are a contestant on Jeopardy -- they don't much matter.
Retirement myths? Quite another story. Those are the myths that often cloud our financial judgment. Left unexamined, they can have serious consequences.
Let's get busy with some retirement and wealth preservation mythbusting.
Myth 1 - the 401k was designed to be a mass retirement program
Many of us believe the U.S. government created 401ks specifically to help us finance our retirement. Kind of like a Social Security-style pension program.
Not even close.
The 401k was an afterthought when it was created in the late 1970s. It was a tiny provision in a much larger tax bill conceived as a tax break for employers. Even the bill's authors failed to divine its later importance.
A humble Pennsylvania retirement planner changed all that.
His name was Ted Benna. Ted had an epiphany. He realized the obscure tax law could prove very useful, with one tweak. He added a matching component, incentivizing employees to save for their retirement.
The use of 401ks skyrocketed.
Yet the results were a mixed bag.
Small companies that previously had no retirement program could now help their workers. Larger companies, however, started replacing costlier pension programs with 401ks.
Soon 401ks became the default retirement option.
Benna isn't thrilled about this. He calls the current system overly complicated. The original plans offered just two choices.
He also believes the 401k isn't suited to be our primary retirement funding mechanism.
Yet it's what we we're left with. So we might as well maximize its utility.
How so? Make sure you're contributing at the top of your capability. You like free money, right? So take full advantage of your employer match.
If you've got plenty of years ahead of you, tilt toward stocks. If you want to play it safe, look at index funds.
And if you switch jobs, strongly consider transferring your money into an IRA.
Myth 2 - Never withdraw more than four percent per year
False. While this is a handy formulation, it's not always relevant. Flexibility is important. Blind adherence to a somewhat arbitrary figure is less useful.
A strict refusal to touch your principal is admirable. A but puritanical, but admirable. It doesn't always make good sense, however.
You should spend your money while you can enjoy it. Saving is just a means to an end. It's not your ultimate goal.
There's no guarantee that staying locked in at four percent will work, anyway. The market may not keep pace with its historic performance. It's important to find a flexible plan that works for you.
Myth 3 - Annuities are an ironclad income source
Some of us believe annuities are a zero risk investment.
That's not the case.
Insurance companies do go bankrupt. It's not a guarantee that all annuities would be paid in such an event. Unlikely, but not impossible.
Annuities have other drawbacks. In a low interest rate environment, annuity payouts are smaller. Annuities are also inflexible. They may tie up a significant chunk of your assets.
Many fixed annuities are not tied to inflation. That means today's payout might look pretty meager ten or twenty years down the road.
Annuities are a useful tool in the retirement toolbox. Yet it's important to be aware of their limitations.
Myth 4 - I'll spend less after retiring
For most people, early retirement is a time of excitement and energy. You're still relatively young and healthy. You suddenly have endless free time. You'll want to travel. You'll want to see all the things you've missed.
Does that sound like a recipe for a spartan life?
Didn't think so.
Myth 5 - I should skimp on my retirement to fund my child's education
Not if it has a significant impact on your quality of life.
Thanks to our federal loan programs, a college education is perhaps the easiest big ticket item to finance. Financing your retirement with borrowed money is far less appealing.
And if you compromise your own future, it's your children who will be stuck with the burden.
There are good myths and bad myths. Good myths are stories we tell ourselves that hint at a deeper truth. They speak to us about values.
Bad myths spring from ignorance or wishful thinking. They give us false confidence. They can wreak havoc on our finances.
We'll do our absolute best to help you avoid them.