Friday, November 2, 2012

10 Financial Planning Myths

1.) “I can retire when I save $X dollars.”  How do you know that? When I hear someone say that a million dollars (or any another number) is the exact amount you need to retire, it shows a lack of understanding.  First, many facets of your financial life tend to change both before and after retirement: inflation, deflation, tax rates, market returns, health care costs, family situations, etc.  The “magic number” is going to change right along with them.  What if you decide to relocate and the cost of living is different?  What if you get divorced?  What if your spouse dies?  What if your deceased spouse never updated his/her will and the estate goes to a previous spouse or children?  What if you suddenly face a serious medical condition that isn’t fully covered by your insurance?  What if you need assisted living and don’t have long-term care insurance?  What if a parent or child falls on hard times and you want to help support them financially?

2.) “Bonds are a safe investment.”  Bonds have different risks than stocks, but they still have risks.  There’s interest rate risk, inflation risk and risk of default.  As interest rates and inflation rise, bond prices fall.  That means your “principal” or amount paid when purchasing the bond will drop.  If you sell your bond to get a better interest rate, you may recognize a capital loss on the original bond.  The reverse is also true.  Your bond’s value will rise when interest rates drop, because your bond will have a higher interest rate than what can be purchased on the market. Interest rates are at historical lows, and many experts are fearful of what may be the fate of bonds in short-term.

3.) “Once you retire, you’ll spend about 25% less than when you were working.”  A recent survey done by Phoenix Wealth indicated that many people will need 100% or more of their current income in retirement.  Usually the same amount of money is just spent in different ways. Health care costs, inflation, and long-term care expenses are a few of reasons why you may need more than you think.

4.) “I only trust investing in real estate.”  Now we all know better, but a few years ago we couldn’t imagine real estate prices dropping so dramatically.  The amount of time it now takes to sell property is much longer than normal.  The biggest problem with real estate is that it is illiquid, meaning you can’t readily convert it to cash. Now that the real estate market has started to re-bound, I fear many folks will slip back into this pitfall.

5.) “You should have X% / Y% portfolio allocation when you retire.” (pick your percentages) How can anyone know this without knowing your entire financial situation?  Each investor’s risk tolerance, timeline and goals are different, as are their intentions for their future lifestyle.  The other main factor influencing an asset allocation is the amount saved.  A long-term saver can afford to take less risk, whereas a late saver may need more growth to make their savings last longer.  Other sources of income such as pensions and post-retirement employment also need to be taken into account.  There is no one size fits all.

6.) “Your tax rate will be lower in retirement.”  Have you watched the news lately? Sounds like everyone’s taxes may be going up next year. And with the debt crisis our country is facing it’s not likely that tax rates will come down anytime soon. There are some instances where you could be pay less in taxes at retirement mainly because you would no longer be paying FICA taxes. But, you’ll likely lose some itemized deductions. Most people don’t realize that there social security could be subject to taxation as well.

7.) “My financial situation is really simple and straightforward.”  You may think so, but when a qualified professional reviews it, they may see opportunities for improvement or danger zones you haven’t noticed. 

8.) “I don’t need a financial advisor. I can do it all myself. I read a lot of financial magazines and watch CNBC”  You might do a great job, but then, how do you really know for sure?  A trained professional with on-going continuing education across the spectrum of income tax planning, cash and debt management, asset allocation, investments, insurance, retirement planning and estate planning can best objectively evaluate your finances in an integrated manner.  He can look at how various aspects influence one another.  He can identify strengths and weaknesses and recommend appropriate actions to take.  Plus, all those talking heads on TV and magazines are focused on the latest hot tip.  A Certified Financial Planner® will help you design a course of action that makes sense for you for many years to come, adjusting along the way as needed.  A professional can help you focus on what counts, not on the noise.

9.) “All financial planners just want a piece of my money.”  As noted above, the financial planning process as defined by the CFP Board of Standards covers a lot more than just investment advice.  It involves a six-step process:  gather client data and goals, analyze and evaluate the client’s financial status, develop and present recommendations, implement the recommendations and monitor the results.  In addition, an unlicensed person may hold themselves out as a financial planner.  A Certified Financial Planner® practitioner must pass the CFP Board exam, continue their education requirements and uphold the standards of integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence. 

10.) “I can’t afford to pay for advice.  Perhaps the reason you can’t afford financial planning is that you may not be managing your money as well as you could.  Perhaps you really need professional advice.  In the long run, those who use a Certified Financial Planner® reach their goals more often and more quickly than those who don’t.

The fact is, there are no certainties about our financial futures, only many changing variables.  Those who go forward alone, face those doubts, situations and decisions alone with limited resources.  They may make decisions based on emotion, not professional experience and training.  Others  wisely use the advice from a Certified Financial Planner. Their futures are just as uncertain, but they have seasoned guidance to help steer their boat on both calm seas and through rough waves.  Their CFP® practitioner is required to objectively put the client’s interest first at all times.  Which way would you rather proceed?

For more about how my financial planning process can help you go to

Article by C. Stone, CFP

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