Investing is an unfamiliar topic for many individuals and one that can easily be misunderstood. While this may initially seem like an easy to navigate area, there are many items to consider when determining your retirement goals and objectives. From timelines to investment amounts to portfolio construction, there is no silver bullet—however, there are plenty of myths. The following are common misperceptions that, if left unchecked, can derail your retirement planning.
Myth #1: I can put off investing since my goal is so far away.
An “I’ll start saving later” mentality is a definite misstep. Time is one of the two most valuable resources for achieving your investment goals. You should establish a regular investment plan as soon as you can. Investors that begin making a set monthly contribution to an account at the age of 25 will be much further ahead than someone who starts 10 years later. The more time you have for your investments to grow and compound, the more likely you are to reach your goals.
Myth #2: It takes a lot of money to build the wealth I need to reach my financial goals.
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The other most important component to achieving financial success is discipline. Individuals should begin investing as soon as possible, and they should stick with their plan regardless of current market conditions. You can always start small and then bump up your contributions as your comfort level and income increase. The key is just to start.
Myth #3: I only need to own the best performing products in my investment portfolio.
One of the most important aspects of successful investing is diversification, which is spreading investments across multiple asset classes, investment styles and types. While diversification does not assure a profit nor does it protect against loss of principal, it's understood that asset allocation is the largest determinant of long-term performance. It's more important than selecting the right stock or mutual fund, as the specific investments selected and when you buy and sell them, only account for a small portion of your return. Creating and maintaining the appropriate asset allocation for your goals should be a top priority for investors.
Myth #4: If I don’t invest enough for retirement, I’ll still have Social Security.
When it comes to saving for retirement, having a long-term investment plan is critical to achieving your goals. According to the 2014 Social Security Administration Basic Facts report, for those 65 years and older, less than 40 percent of total income is provided by Social Security payments. And that percentage is decreasing as baby boomers near retirement. Social Security should only be considered as a supplement to your retirement income needs. Taking advantage of investment opportunities throughout your working years can help maintain your standard of living in retirement.
Myth #5: When I reach retirement, I can withdraw the average annual appreciation of my investments and never touch my principal.
This is an apples versus oranges statement. Regardless of the number, your average appreciation percentage is not a realistic withdrawal rate. Life expectancies have increased, yet the planned retirement age for most people remains unchanged, so your retirement income will need to last longer. Establishing a realistic withdrawal rate is a major factor in your long-term retirement plan. In an extended declining market, withdrawing too much from your investments could result in depleting your portfolio prematurely.
Retirement planning can be a complex and intimidating process. The key is to do your research and work with a trusted advisor who can help you determine your goals as well as your strategy. This will help you set the right retirement path, as you will be working with facts rather than fiction.
John Leis is Vice President of Personal Financial Solution for American Century Investments. He may be reached at 816-340-4271 or firstname.lastname@example.org.