Retirement Misconceptions: How to Stay on Track

Don’t let retirement planning misconceptions sabotage your financial security in your golden years. Deciphering the myths from facts can help in creating a stable plan.

Here are five misconceptions that can hinder savings goals.

1: Living solely off Social Security money.

Nick Shannon, founder of Prestige Wealth, said that many people tend to underestimate the amount of savings they need for their desired retirement.

“The Social Security program is meant to only cover about 40% of an individual’s pre-retirement income,” he said. “For individuals making over $168,600 or more – this replacement percentage is even lower. Retirement savings are a vehicle meant to supplement your Social Security benefits.”

Trisha Beccard, financial portfolio advisor and assistant vice president with TS Prosperity Group said it is possible – and necessary – to come up with a unique strategy that works for your specific situation.

“For those who overestimate Social Security benefits, it might be a good idea to find a financial planner who specializes in holistic, retirement planning,” she said. “They could help design a strategy that will best meet your needs and maximize retirement savings. It’s important to also have that planner willing and able to meet with you regularly (at minimum, annually) so you can prepare for your future proactively instead of reactively and adapt as needed.”

2: Not taking full advantage of 401(K) match.

Eric Rickert, financial advisor for Shunkwiler Financial, said that if your employer offers a 401(K) or other retirement matching plan, it is important to utilize that as much as possible. Doing so will help you stay more confident through your retirement years, even when unexpected shifts in the market happen.

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“Underestimating inflation and how it can cause a strain on your savings in retirement is a major mistake,” he said. “If inflation averages 3 to 3.5% per year, the cost of everything will double in 20 years, which in turn goes into underestimating how long you will live. We are having to plan for 25 to 30-year retirements now instead of in the past 15 to 20 years.”

3: Not saving because money is tight.

Rising prices for groceries, higher interest rates, gas costs, and inflation are just some of the things that the average American household faces right now. But even contributing a small amount to retirement is better than nothing. By contributing a bit now, you can take advantage of potential compound growth in the future. In addition to working on paying down high-interest debts, there are other ways to get on track to think long-term, too.

“I suggest sitting down, creating a budget, and then determining where spending can be reduced or cut to increase retirement savings,” Beccard said. “For assistance with budget creation, there are great resources online or in some cases, at a local bank or credit union.”

Shannon echoed the need to start somewhere – no matter how small that is.

“I like to say that cash flow is king in retirement,” he said. “By prioritizing retirement savings within a cash flow analysis, even a relatively small, consistent amount can significantly improve an individual’s ability to live a comfortable retirement.”

Gaining more understanding of the stock market can help when building a strategy.

“Markets are near or at all-time highs and if there is a dip in the market, then as you are putting money into your retirement plans or investments, you will be purchasing more shares,” Rickert said. “If you don’t know much about investing, use your resources at your employer or reach out to a financial adviser for guidance.” 

4: There is still plenty of time to save.

Retirement might be a long way off, so you might not think it’s time to prioritize saving for that time of your life. Or for some people, they think that they’ll just work forever. Both methods of thinking could be detrimental to your future. There are often life circumstances that will force you to stop work – health concerns, family obligations, etc. In these cases, you may find yourself stuck with little to no income and no plan to fall back on.

“When it comes to saving for retirement, the toughest concept for individuals to grasp is delayed gratification,” Shannon said. “When an individual is saving for an event that is 20, 30, or even 40 years down the road – it can be hard to stay disciplined.

“Saving money is essentially a sacrifice. I take pride in educating my clients about how making these sacrifices now can give them so many more options down the road. Some of those options may be retiring early, spending more in retirement, or leaving a legacy for family or charity.”

5: Relying on an inheritance.

Inheritances can significantly boost your retirement savings, but relying completely on that inheritance is very risky.

“It should not be a major part of the retirement plan,” Shannon said. “If an aging parent or relative has major health issues, legal issues, or simply runs out of money – an inheritance can simply vanish. When I plan with clients, we view an inheritance as a ‘bonus’ instead of a sure thing.”

The Bottom Line

Even with all the right information in hand, retirement planning can be confusing. There are a lot of details to be aware of and it requires a mindset that is patient, proactive, and determined.

One of the best ways to get you on the path toward a solid financial future is by finding and regularly meeting with a financial adviser that you trust. This person can look at the inner workings of your finances and talk to you about how you can make your personal retirement goals come true. Together, you can come up with a plan that works for you and helps you live the life you want as you get older.

“Unless you’re on the cusp of retirement or at retirement, you’re in it for the long game,” Beccard said. “As long as you have a well-diversified, balanced, and managed portfolio, continue making your contributions and stay the course.”

Maximizing a Retirement Portfolio with Dividends

With some proper planning, consultation with a financial planner or other investment professional, and some research of your own, it’s possible to maximize your retirement portfolio with dividend payments. In fact, the cash flow that you get from those payments can significantly help supplement your pension and Social Security income. In some cases, those payments can even surpass that income and people can live off that alone. The key is to start investing as early as possible. Doing this will give you more time to compound your money and add to your portfolio.

While there are a variety of ways to maximize your portfolio with dividends, it is important to keep in mind that there is no ‘one size fits all’ solution.

“Every individual’s situation is unique, and their retirement portfolio should reflect that,” said Nick Shannon, founder of Prestige Wealth.

Think about how long you want to invest in these funds before needing them to reach your goal. Consider what your comfort level is regarding investment risk and determine which sectors of the market the assets you want to invest in, such as stocks, bonds, or other.

Then, consider opening an account and investing solely in dividend-paying stocks. There are a variety of resources out there that provide information on which companies have historically paid dividends. The next option is to invest in dividend-paying mutual funds.

These funds are invested in those dividend-paying companies inside of the mutual fund and the dividends that are paid out are then either paid to you or reinvested into your account,” said Eric Rickert, financial advisor at Shunkwiler Financial.