18 Big Financial Planning Misconceptions

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Editor's Note: This story originally appeared on NewRetirement.

Here are some of the worst financial and retirement planning misconceptions and easy steps you can take to overcome them today.

Misconception 1: Retirement Planning Is All About Your 401(k)

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When you ask someone if they have a retirement or financial plan, the most common answer is, “Yes! I am saving into a 401(k).”

No doubt, this is fantastic. You absolutely need to save. Saving money is a foundational element of any financial or retirement plan, but it is far from everything that you need to consider. It’s not necessarily the key to your long-term wealth and security.

A financial plan is actually a written document showing all aspects of your current and future income, expenses, debts, and assets.

Studies show that less than 30% of Americans have a long-term financial plan. However, effective financial and retirement planning is important — and it can be easy.

A retirement plan is a detailed roadmap to your financial security now and forever.

Forbes Magazine called the NewRetirement Planner a “new approach to retirement planning.” It is an easy-to-use, comprehensive, do-it-yourself planning system.

This tool makes it easy and convenient to create and maintain a detailed and flexible retirement plan.

Misconception 2: Money Is More Important than Time

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Most people are worried about their ability to pay bills and save for retirement. However, how you spend your time — the kind of work and leisure you do, who you spend time with, and how early or late you choose to retire — is what’s truly important.

Time is the key factor if you believe that happiness and fulfillment are the measures of success. Study after study has shown that how you spend your time is what results in your happiness — not how much money you have.

It’s not uncommon for someone to toil away at a job they don’t like in order to save enough money to gain financial freedom. But it doesn’t have to be this way. Options include:

  • Working more for a shorter period of time to get to an earlier retirement
  • Achieving passive income sources
  • Working less, for potentially less money but more freedom
  • Finding work that feels like play, at perhaps a lower salary
  • Spending less now (or in the future) to retire earlier
  • Tapping into resources and opportunities beyond savings that can help you achieve an earlier retirement

Misconception 3: A Retirement Plan Is Different From a Financial Plan

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They are essentially the same thing. Think about it, being able to retire comfortably is the ultimate goal of a financial plan.

Financial planning encompasses both short- and long-term goals, but the point of all good financial decision-making is to fund your entire life, including retirement, in a way that is optimal for you and your values.

Misconception 4: You Don’t Think of ALL Financial Decisions as Retirement Decisions

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We make big and small financial decisions all year every year. Do you:

  • Get the pumpkin spice latte or make coffee at home?
  • Get takeout or boil pasta for dinner?
  • Splurge on the Hawaiian vacation or go camping?
  • Buy a used car or a new luxury import?
  • Fund college or make the kids get loans?

Your answers to all of these questions and every single financial decision you make will have an impact on your current AND future finances.

Most people think of these decisions as a monthly budget or a short-term financial planning issue. However, every bit of money you spend, save, or earn culminates in your retirement security.

Misconception 5: You Think of Finances as Simply Inflow and Outflow

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It may be useful for you to think about your finances not as a monthly inflow and outflow, but rather as a big pool that you fill up or drain over your entire life. Think in terms of the lifetime value of your financial decisions rather than simply how it impacts you today.

You see, in life, you have a finite amount of time to create a finite amount of money. That money is used to fund your entire life. Spending more now means that you have less to spend later. Saving more now means spending less in the near term, but more in the future.

Creating and maintaining a detailed retirement plan is a great way to visualize and manage your total pool of resources over your entire lifetime.

Misconception 6: Investing for Long-Term Growth Requires Specialized Knowledge

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Most people know this, but it is worth stating what may be obvious: It is not enough to save money — you also need to invest it for growth, especially when you are young.

You will have different investment goals at different stages of your life, but for most of your working years, you want to invest for growth. And, even after retirement, you need to invest a percentage of your money.

To achieve growth, you can do a lot of research and try to pick stocks and concoct a finely tuned portfolio of different investments. However, the tried and true simple method for growth is to invest in index funds.

Index funds are game-changers because they enable you to invest in all of the strongest companies in an index, say the S&P 500, for example, instead of trying to beat the market by picking individual winning stocks.

As you get closer to retirement, you will want to shift your asset allocation to include other types of investments, but you can continue to keep it simple.

Misconception 7: A Quick and Simple Retirement Calculation Is Sufficient Planning

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Retirement calculators are everywhere on the internet. And they seem reliable. They come from all kinds of reputable, (and not-so-reputable) companies. However, you should be wary of these simple tools.

You can NOT be assured of a secure future using one of these simple retirement calculators. They typically use hundreds of assumptions and averages that do not reflect your situation. There is no way you are “average” on all aspects of a complete financial picture.

Misconception 8: Your Savings Are the Most Important Levers for a Secure Future

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As mentioned earlier, retirement savings are a critical component of a retirement plan. However, your savings are not the only important element of your future security. In fact, you might be surprised to know that savings may not even be your most valuable lifetime asset.

Other factors can be far more valuable than the sum of your savings.

  • Delaying the start of Social Security can literally gain you hundreds of thousands over your lifetime.
  • If you own your home, you can tap your home equity for retirement, gaining you more thousands — if not millions — to use for retirement.
  • Planning to reduce expenses in retirement can dramatically improve your retirement cash flow. (And, downsizing or retirement abroad could also enhance your lifestyle.)
  • Accelerating debt payoffs can sometimes be a better use of money than saving into your 401(k).
  • Careful tax and retirement income planning can also gain you hundreds of thousands over the course of your life.
  • Passive income is an increasingly popular strategy for boosting wealth. What’s more, you may want to consider how interesting retirement work can keep you mentally and physically healthier (and wealthier).

There are hundreds and hundreds of inputs that go into creating a detailed and complete retirement plan — and many of these levers will have a higher lifetime value than the sum total of your savings and investments.

Misconception 9: Financial Planning Is Only for the Wealthy

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Do you hear “financial plan” and imagine a limo arriving at a Wall Street office? Well, sure, the very wealthy employ teams of wealth managers. However, regular people benefit greatly from financial planning.

In fact, research finds that written plans may be especially important for people with low- and moderate-income levels. One-third of households with less than $48,000 in annual income with a written plan save 10% or more of income, compared with about 1 in 10 households in that income range without written plans.

Misconception 10: All Financial Advisers Are Equal

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You may not be aware, but there are many kinds of financial advisers and the way they are compensated varies greatly. If you want to benefit from the wisdom of a financial adviser, you need to know their qualifications and how they make their money.

Qualifications

Some, so-called financial advisers are insurance or investment salespeople. They certainly have expertise, but their interests do not always align with your own financial objectives. It is wise to look for an adviser with a respected designation like a Certified Financial Planner. You also want someone who is willing to act as a fiduciary (in your best interests).

How the adviser is paid

It is fairly common for people to use a financial adviser associated with an investment firm and believe that the advice they receive is “free.” However, much free advice is funded by a fee (an assets under management or AUM fee) you pay for the adviser to manage your money. These fees can really add up and the advice may be tuned toward getting more of your money to manage rather than what is best for you.

Many people find that they would rather pay an adviser an hourly or annual rate for a specific financial service.

Misconception 11: A Financial Plan Is a One and Done Activity

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Okay, let’s say you are doing better than most, and you already have a written retirement plan. That’s fantastic. However, the real trick for more wealth and security is to keep it updated.

Your retirement plan should be a living document, and retirement planning needs to be an ongoing process.

Too often people meet with a financial adviser or do an online retirement calculator and think that their job is done.

Unfortunately, things change. There are external factors that impact your finances (stock markets, real estate prices, inflation, etc.) as well as internal factors (like your health and family, goals).

Any detail can have a big impact on your personal retirement plan.

Misconception 12: Medicare Will Cover Most Health Costs After 65

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Getting your retirement plan right means visualizing your future and creating plans for all potential expenses.

For most people, the biggest overlooked cost is health care spending. According to Fidelity, an average retired couple aged 65 in 2021 may need approximately $300,000 saved (after tax) to cover health care expenses in retirement. This is only slightly less than the lifetime value of the average Social Security income. The average annual Social Security income is around $18,000. If you were to start benefits at 65 and live to average longevity (another 18 years), your total lifetime payout would be $324,000. This is just $24,000 more than your out-of-pocket health care cost.

And, that doesn’t even include the possibility of funding a long-term care need.

The NewRetirement Planner helps you account for all the expenses you might overlook. The system even helps you create a detailed and personalized estimate of your out-of-pocket medical costs and helps you plan for the possibility of needing long-term care.

Misconception 13: The Shift From Spending to Saving Can Be Difficult

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You have spent your whole life working and saving money — paying down your mortgage and putting some away for retirement.

Retirement IS the time to spend it. This is a huge perspective shift and something that people find problematic. Figuring out an efficient way to spend your money while making sure that you don’t run out can indeed be tricky.

There are tax considerations, required minimum distribution rules, figuring out how to make your money last as long as you do (no matter how long that turns out to be), growing your money while minimizing risks, and many other considerations.

Misconception 14: A Financial Plan Is Just Numeric Calculations

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Most people think of a spreadsheet when they consider financial planning. And, yes, a reliable financial plan may involve thousands of cells of data and thousands of calculations and probabilities.

However, your values and the type of person you need are to guide your financial decisions.

Your financial plan can be as unique as you are.

Misconception 15: You Can Never Save Enough

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Yes, saving is usually necessary and the foundation of a good financial plan. However, there can be too much of a good thing. In fact, Morningstar estimates that perhaps 40% of people are over-saving.

Find out why people save too much and get advice from over-savers, people who suspect that they may have more than enough.

Misconception 16: There Is a Right Way to Plan

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There are loads of rules of thumb and best practices for financial planning. However, it is entirely possible (and for the right person, even desirable) to build a plan that breaks every rule in the book.

A financial plan should help you identify your goals and figure out how to achieve them. You can have a secure retirement by spending very little, saving lots, working a long time, etc.

You just need a plan for using your time and money in a way that suits what you want out of life.

Misconception 17: The Value of Your Savings Is the Most Important Financial Planning Metric

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Everyone seems to want to know, “How much savings do I need to retire securely?” Or, “What is my net worth?” These are important questions, but only answerable by knowing how much you need or want to spend (and why).

Knowing what you want to do with the rest of your life and figuring out how much that is going to cost is the most important metric. It determines how much money you’ll need.

Misconception 18: Retirement Is a Time for Dwindling Finances

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Nope. Not true. Yes, in most cases, retirees draw down their savings. However, with sufficient savings and a good plan, it is entirely possible, and even common, to increase your wealth after retirement.

Here is a guide to increasing wealth after retirement.

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