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Over the years, retirement planning has evolved in significant fashion and part of that evolution includes the realization among advisors and clients that what worked 20, 30, 50 years ago may not be applicable today. Sure, there are some strategies that are tried and true and some are still relevant today, but neither advisors nor retirees should hang their hats on that notion.
In order for clients and do-it-yourself investors to thrive in the new retirement landscape, some old guard myths need to be busted and that needs to happen as soon as possible. Let’s start with one that’s good news for advisors and folks that are clients: not needing an advisor in retirement.
To be absolutely clear, that is a myth. Unless a person or couple is of significant means, not having an advisor when retired is a mistake. Think about this way: there are reasons why many clients that are in the high- and ultra-high-net-worth segments are, well, clients. They know they’re experts in all the elements that go into a proper retirement strategy and they want to protect their hard-earned capital.
For the rest of us, advisors are highly relevant in retirement because professional advice can go a long way with issues such as boosting and stretch retirement income, long-term care planning and insurance matters, just to name a few.
A related myth is that in lieu of an advisor, a retiree can simply be another number to an asset manager/fund issuer and buy target-date funds. On the surface, that reduces a lot of perceived hassle, but it does nothing to prepare the investor for other retirement-related issues and it is no guarantee of being helpful in terms of returns.
Speaking of investments in retirement, that’s a minefield of myths, some of which will be dispelled below.
Busting Bond Myths
Fixed income is often viewed as the cornerstone asset class of retirement portfolios on the basis that retirees need income more than capital appreciation sourced via risk assets. That thesis has been dealt a blow by interest rates.
Moreover, there are some bond retirement myths that need to be put to bed, including the notion that an investor’s fixed income exposure should be comparable to their age. For example, a 70-year-old should have a portfolio that’s 70% in bonds. That’s a myth.
“This rule might have been a good idea when people only lived to their mid-60s. With life spans increasing, holding too much in bonds could leave you with an inflation shortfall. Rather than base your bond percentage on your age, consider an allocation that matches your financial needs and risk tolerance,” notes Morningstar’s Sheryl Rowling.
Another myth is that in addition to bonds, retirement portfolios should have large allocations to dividend stocks. On the surface, that sounds nice because it indicates the portfolio is generating income from two asset classes, but there are tax considerations that cannot be ignored.
“Interest income is taxable as ordinary income. For those who might point out that municipal bonds are not taxable, remember that their return is less,” adds Rowling. “Stock dividends are taxed at capital gains or ordinary rates, depending on the type of dividends.”
Point is a portfolio that is driven more by returns and less by income is more beneficial on the tax front.
Speaking of Income Myths…
One of the biggest retirement myths that advisors can dispel is the notion of living solely off of income and not touching the principal in invested assets.
In theory, that sounds nice because it leaves those assets in place for a rainy day or to be handed down to heirs, but as noted above, there are tax implications to that strategy. Plus, the “income only/no principal” strategy doesn’t account for inflationary spikes such as the one seen over the past several years.
“What’s better is to invest in a diversified portfolio. Let’s say instead of investing in bonds, you invest in a diversified mix of stocks and bonds. The portfolio grows at 5% a year and generates income of 2% a year. This leaves 3% for growth, which will offset inflation,” concludes Rowling.