Retirement Investing Myth 1-
Get out of equities and put your money in the bank
Unless you’re rich, this retirement investing strategy won’t work. It’s the rich guy that can afford to be super-conservative. With $5 million, he can put his cash in the bank and earn two percent and have $100,000 yearly income. But if you have $1 million, you cannot live on 2% interest, or $20,000 annually. You have no choice but to take more risk to earn more. If you don’t invest for higher retirement returns, your funds will surely run out before you do. If you invest for higher returns, even though you take on more risk, you at least give yourself a fighting chance of having your money last as long as you do. So the paradox is that rich people can invest for retirement more conservatively while those with fewer financial resources MUST invest more aggressively if they have any hope of having their retirement savings last. To see the proof of this, please look up the Trinity Study.
Retirement Investing Myth 2-
Sell the house, trade down and invest the excess
While this is not a bad idea, don’t feel that your retirement investing strategy needs to run your lifestyle. You might like where you live and not want to move. So keep the house and get a reverse mortgage. This type of loan allows you to tap the equity in your home and live on it or add it to your retirement investing portfolio to generate income. It’s almost a certainty there won’t be any home equity left for your kids (the loan gets repaid out of the home equity), but would you rather them inherit a bunch of money while you spend your last decade dining on dog food? Who comes first? YOU DO! So stay in the big house if you like, enjoy the equity and live better. Note that because the reverse mortgage balance never needs to be repaid as long as you remain in the home, the balance could well exceed the equity in your home, but you won’t care! That’s the lender’s problem for which you are never liable.
Retirement Investing Myth 3-
Pay off Your Mortgage
This retirement investing move makes sense if your mortgage payment exceeds your opportunities for retirement investment income with the same amount of principal. As I write this, I am refinancing my house for 10 years at 3.875%. If I can invest my money for more than this rate, I am better off leaving the mortgage in place and making investments. Of course, the investments must have a fairly high safety profile as these investments are being supported by debt you cannot escape (actually, in some states you can walk away from purchase money mortgages which are non-recourse).
Retirement Investing Myth 4-
Leaving Money in Your Ex-employer’s Retirement Plan
Most plans are segregated from your employer’s assets so there is no risk to your money. The problem is that your employer is likely being ripped off in terms of the fees and expenses YOU pay on the plan investments. Your employer may not have looked very closely a the internal expenses on the investments and there’s a good chance that the person who selected the provider had no financial background, never read the prospectuses and selected the plan provider who bought them the nicest lunch. So before you leave the funds in the employer’s 401k or other qualified plan, either take a hard look at the expenses or just rollover the balance to your own IRA.
Retirement Investing Myth 5-
Not understanding the Game
How much chance would you have of winning a football game if you did not know the rules? Better than 90% of investors play the ‘investment game’ and they don’t know the rules. When you deal with a securities brokerage firm, their goal is to earn commission. They are not your friends. They are not looking out for your best interests. I am not saying these people are bad but don’t ever get lulled into some stupor that the nice broker is taking care of you. That is not his firm’s position. In fact, any brokerage firm that offers fee based accounts (they all do) must prominently disclose the following:
‘Your account is a brokerage account and not an advisory
account. Our interests may not always be the same as yours.
Please ask us questions to make sure you understand your
rights and our obligations to you, including the extent of our
obligations to disclose conflicts of interest and to act in your
best interest. We are paid both by you and, sometimes, by
people who compensate us based on what you buy. Therefore,
our profits and our salespersons’ compensation may vary by
product and over time.’
Of course, most people don’t read the papers they get but be clear—the securities firm’s interests are not necessarily aligned with your interests. They have an incentive to introduce and peddle ‘packed products’ (mutual funds, ETFs, close end funds) rather than individual stocks and bonds because the fees in these packaged products are higher and obfuscated so you don’t know what you’re paying.
Retirement investing has never been so exciting!
I always hear that you should pay off your mortgage and I can understand why people say that, but I look at it another way. If I pay off my mortgage early, it means I’ll have to reduce my investments. If I put my extra money into an investment account at some point my investment account will be worth more than my mortgage balance. Now, I can rest easy knowing that I can pay my mortgage off any time I want.
Here is another thought. If I were to pay my mortgage down to the point where most of it was paid off but there was a financial emergency that prevented me from paying the balance, the mortgage company doesn’t care that I’ve paid extra payments for several years. They can still foreclose on this house. There goes all those extra payments down the toilet.
I personally would rather have money in my bank account.
I think point number one is so important and misunderstood. You have to look at the entire portfolio to access the risk of an investment. Investing all your retirement in t-bill or a savings account is not safer than having a diversified portfolio. As you say it is a way to assure failure (unless you have more money than you can ever need already).
well, in different countries retirement investing could be different, I for instance am looking at the various ways to create a passive income such as invest in real estate with high rental yields, promote websites that would require minimum maintenance at a later stage and bring in some steady income etc.
Good post but …
Myth #1 – As for investing $1 million, it’s quite easy to find a CD at 4.1% or an A Rated Bond at 6.1%
Myth #2 – A reverse mortgage is only good if you don’t have children or family you intend to leave inheritance to.
Myth #3, Capital Gain taxes will generally blow this strategy out of the water.
Myth #4 is spot on.
Myth #5 is dead on again.
Ask any retired broker and they will tell you “never trust a broker”. A successful investor is the one who educates themselves to the varying strategies and chooses the options best suited towards their financial plan.
I have friends that are quite succesfull with their investment. Most of them are investing in properties, gold, and stocks.
why if we can get reverse mortgage ?
it is believed that the reverse mortgage balance never needs to be repaid as long as you remain in the home, the balance could well exceed the equity in your home, but it will give a bunch of problem to the lender..
@Cheap places to eat… I used to think the same way but that’s why it’s important to have 3 – 6 months of expenses in an emergency fund. You are right, in that you need to protect yourself… that’s what the emergency fund is for. Also, if you are paying less (or nothing) to the mortgage company, you have more for yourself and your retirement and you won’t have the stress of making that mortgage payment (or not) in an emergency situation.
Retirement money should be invested in a good way so that one gets a handsome amount in return. Wasting the retirement savings will ruin old age benefits and God forbid one will have to face hard times.