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Wall Street’s Top Four Retirement Planning Myths

Post a Comment March 16, 2010 – 3:03 pm | Post Link |  Print This Post |

Trust in big Wall Street firms is at an all-time low as a result of the current U.S. financial crisis. Scott Burns, chief investment strategist for AssetBuilder, says this development isn’t all bad– because individual investors will now think twice about buying into Wall Street’s prevailing financial planning myths.

“People are moving their money away from the major brokerage firms to smaller, independent advisors,” says Burns,  syndicated columnist and co-author of the book “Spend ‘Til the End: The Revolutionary Guide to Raising Your Living Standard – Today and When You Retire” (Simon & Schuster, 2008). “This means they will be exposed to less self-serving Wall Street hype – particularly when it comes to planning for retirement.”
Burns says Wall Street’s full-service brokers have led investors to take on too much risk and to pay too much in fees by propagating the following four retirement planning myths:

Myth 1: Fees don’t matter.
“Wall Street firms don’t want you to think about fees.  They want you to subscribe to the magical belief that costs don’t matter.  But they always matter,” Burns says.  “Investment expenses can be reduced by more than 2 percentage points a year in some cases, which can have a dramatic impact on your total return. Remember: Costs are constant. Performance is not.”

Myth 2:  Your good investment earnings must replace 70 percent (or more) of your current income at retirement.
“Wall Street calls it your ‘retirement income replacement rate.’ It’s the percentage of your pre-retirement income you ‘need’ to sustain your standard of living in retirement,” Burns says. “I call it ‘replacement bait.’ The percentage is set so high that it pressures us to save an excessively large portion of our income – or to take on excessive risk in an attempt to reach unrealistic financial targets.”

Myth 3: Risk diminishes over time.
“People buy into the idea that risk diminishes, the longer your investment term.  It doesn’t,” Burns says.  “Your risk from holding stock, for example, depends on both the extent of your stock holdings and your spending behavior.  If your spend-down rate is too high, stocks will be riskier the longer you hold them.”

Myth 4: You should invest as much as possible, as early as possible.
“This is a great idea — for the financial services industry.  But it is contrary to the way real life works for most people,” Burns says. “It’s understandable that Wall Street would want to start collecting fees and commissions on our savings for decades before our savings will do anything for us.   But we need to remind ourselves that our retirement savings are their lunch.  This doesn’t mean we don’t all need to save. It simply means saving a lot of money at the appropriate time.”