Baby Boomers: Don't Buy Into These 10 Pre-Retirement Investment Myths
By Forbes Councils Member
As Baby Boomers approach retirement, they may encounter a lot of so-called “expert” advice telling them how to invest just before or during their golden years. While some of this guidance is sound, other tips are myths that may, in fact, steer investors in the wrong direction. To help clear up contradictory and misleading advice, we asked a panel of Forbes Finance Council members to shed some light on the best way to approach near- and post-retirement investment. Below, they debunk a few of the most common myths and explain what you should do instead.
1. ‘Safe Investments Like CDs Are Best’
The biggest risk facing retirees isn’t “the market,” it’s inflation. Most of today’s retirees can expect to live 30 years or more. At 2.5% inflation over 30 years, safe investments like CDs will lose half their purchasing power even though they appear to not go down in value. That’s a guaranteed loss in my book. Most retirees should have 50% or more in stocks at all times to combat inflation. - Erik Christman, Oxford Financial Partners
2. ‘You Can Make A Big Investment All At Once And Start Seeing Income’
Investors and financial advisors can’t flip a switch and start taking income when someone retires. It takes time and planning over months or even years. There’s this not-so-sexy term called “reverse dollar cost averaging,” and it affects everyone in retirement. This RDCA factor requires you to modify your portfolio of holdings and involves accounting for macroeconomic risks that are changing daily. - David Miller, PeachCap Inc.
3. ‘You Can Spend 4% Of Your Retirement Funds Annually’
The old assumption that you can spend 4% of your retirement funds annually and not run out of money needs a reboot. People are living longer and medical care is costing much more. It would be safer to assume a 3% rule. While that seems like a small change, if you crunch the numbers it makes a big difference, especially if you are nearing retirement and planned on using 4%. - Robin Campana, Bulldog Solutions
4. ‘Focus On Accumulating Assets’
Those who are retired or nearing retirement should shift their focus from accumulating assets to turning them into income. Retirement is all about income. Once the income is solved, make sure you have increasing income: Everyone we talk to who has two or more paychecks that show up every month has a lot more peace and freedom in retirement. - Michael Foguth, Foguth Financial Group
5. ‘Toss Your Stocks To Reduce Your Risk’
A common myth is that those investors in or around retirement should throw out all their stocks because it can be too risky to keep them. While it’s not a good idea to sink every penny into stocks, they can be very beneficial for a rounded portfolio. The best thing for your nest egg is to keep your options rounded so you can benefit from a variety of investments. - Greg Herlean, Horizon Trust
6. ‘Medicare Will Cover All Your Health Expenses In Retirement’
The most common myth around retirement is that Medicare pays for all of your health expenses, including long-term-care costs. One out of two people over the age of 65 will need some form of long-term care, so invest in a long-term-care policy, even if you feel you won’t use it. LTC insurance is a policy we all should have and hope we don’t use, versus needing it and not having it. - Sina Azari, Present Financial Partners
7. ‘Lean Conservative In Your Investments’
It is a myth that it’s wise to always tilt heavily toward conservative investments as you near retirement, as this does not always consider your estimated retirement spend, which assets you start with or how to keep up with inflation. There is also an inverse correlation between bond prices and interest rates, which is increasingly important with rates as low as they are now in conservative portfolios. - Sonya Thadhani Mughal, Bailard, Inc.
8. ‘It Doesn’t Matter Where You Draw Your Retirement Funds From’
Leading up to retirement, so much attention is on accumulating assets, but it’s a myth that saving is where the planning process ends. Now, it’s equally important to know which accounts to tap first when withdrawing funds so that you can maximize your tax-exempt, tax-deferred and taxable accounts. A smart withdrawal strategy can have a significant impact on preserving fuel for retirement. - Jay Shah, Personal Capital
9. ‘Move Everything To Fixed-Income Instruments’
Generally, it is advised to move one’s retirement portfolio from stocks to fixed-income instruments. Still, one should be careful not to move all investments into bonds. You may invest up to 40% of the portfolio in stocks through less-risky index and mutual funds. Even if the opportune time does not come for you to liquidate the stocks, you can still have your children inherit them. - Atish Davda, EquityZen
10. ‘Go High-Risk/High-Return To Speed Up The Process’
The prevailing myth when it comes to Baby Boomers near retirement is to invest in high-risk/high-return stocks in order to incur the quickest returns possible since they are getting older with less time to invest. But getting fast and loose with your money is also the quickest way to lose what you invested. No matter your age, you can grow your investments with medium-risk stocks. - Jeff Pitta, Senior Market Advisors
In smaller print is the catch: When the 0% interest period ends, your rate for any balance you have left is going to shoot back up to 18-22%. If you’re not downright religious about paying off your balance every month, these offers can be tricky to navigate. Sometimes trickier than they are worth.
But a new type of credit card offer dropped into my inbox a few weeks ago. One I hadn’t encountered before. One for an interest rate that had not entered my orbit in at least a decade.
Behold the kind, generous offer: I can enjoy 8.99% interest on new purchases made made from June 1 right up to the start of the holiday shopping season. On December 1, my interest rate will return to the norm for me, which right now is 18.24%. There’s no sneaky deferred interest here that can plague some other credit offers, but I will have to pay the higher interest rate on any new purchases that have balances remaining at the end of the promo period.
I knew what this was: a clever tactic to get me to spend more money on a card that usually lies ignored at the bottom of the plastic pile until I need to buy a ticket on a very specific airline. Just like your ex isn’t actually concerned about your sleep habits when he texts, “U up?,” credit issuers don’t just toss out lower interest rates for fun. They are, in fact, checking to see if I am up.
But it would not be enough for me to simply write off this offer. I called upon a few credit card experts to remind me that this promotional APR that seemed temptingly better than the standard, agonizingly inflated APR, could be dangerous.
Even though this offer was “especially for” me, Michael Foguth of Foguth Financial Group confirmed that the offer I received wasn’t personal at all. It’s more likely that the institution has capital it wants to loan, he said. “It’s cheaper for them to go to existing clientele and have them spend more money than to bring in new clients,” he said. “The cost of acquisition is a postcard stamp or less.”
What about that lower interest rate? Is it worth using that card a bit more during the promo window?
Sure, Foguth said, if you’re looking to switch up your primary card for the summer. My card in question does offer rewards, so changing up the card I typically reach for could diversify my reward earnings. (I did activate that offer with just one click, in case you’re wondering. It was really that easy.) But Foguth went back to the simplest rule of credit card use: “Even if you have an introductory rate of 3%, you should still do your best to pay it off,” before the introductory period ends, he said.