Skip to main content

As you near retirement, some kinds of insurance are no longer needed. Income preservation becomes a big focus, so some people consider buying annuities or long-term care insurance.Andreas Kaspar

There are many ways to implement a successful retirement strategy. One of them is to carefully map out a sensible financial plan and then stick to it through thick and thin; another is just to wing it, using your intuition and gut feelings and hope for the best.

Although these two courses of action seem like a ridiculous comparison on paper, far too many people choose the latter option when planning for retirement. A large segment of the working population believes that their hunches will get them where they need to go without a solid foundation. This article will address several major misconceptions that people commonly harbor when it comes to retirement planning.

Intuition #1

You should be able to better predict a stock price tomorrow compared to predicting where it will be 10 years from now, and there is a much lower chance of a big drop in a single day than there is over time in a given stock or fund.

The Reality

Numerous studies conducted by economists, market researchers and investment companies have repeatedly shown that it is often less risky to hold stocks for longer periods. It is extremely rare to find a 10-year period in which the market delivered a negative return. Stocks and real estate are the two big asset classes that have outpaced inflation over time, and despite some bearish periods, they have slowly risen in value and will likely continue to do so.

Intuition #2

If I don't sell my losing position, then I don't have a loss.

The Reality

This is sheer nonsense. You are losing money in a declining stock, regardless of whether you actually sell it or not. You won't be able to claim a loss, but the difference between realized and recognized losses is only for tax purposes. Your actual loss is the same regardless of what is or is not recognized on the tax return.

Intuition #3

Let the managers and professionals handle it

The Reality

Although professional portfolio management is a wise choice in many instances, it is still necessary to be personally involved in the management of your finances. It's OK to delegate market trading to a pro, but don't leave your finances entirely in the hands of your broker or banker. Many people will take more time to find a deal on eBay than manage their retirement. Yes it's more important to make sure that your assets are allocated correctly than to find a used copy of The Godfather Trilogy.

Intuition #4

Retirement is a long way away, and I therefore won't have to worry about it for a long time yet.

The Reality

This is perhaps the most dangerous myth of all. You will be poor and dependent upon relatives if you don't get this under control, now. It will take time for your investments to grow to what they will need to be to sustain you through your non-working years. If you don't start saving now, then you won't have that time.

Intuition #5

I should put all of my retirement money in totally secure investments, especially after I retire.

The Reality

Not necessarily. You might be able to get away with this, but most retirees should have at least a small portion of their savings allocated to equities in some form, either through individual stocks or mutual funds. You need to sit down with your financial planner and run a realistic cash-flow projection that can predict with reasonable accuracy whether a portfolio with no market risk can sustain you through your retirement years.

Intuition #6

The pension the government pays will sustain me through my retirement years.

The Reality

Dream on. What you get is a bare-subsistence income at best that will certainly not provide you any kind of comfortable life. It might cover rent or a mortgage payment plus utilities, but the rest will probably be up to you. Don't count on the government to meet all your retirement needs.