Don't Fall for These Common Misconceptions About Financial Planning

While many people understand the basic idea and benefits of financial planning, many also have several misconceptions about the process.

That’s understandable – there are a lot of intricacies to properly managing one’s finances, and the process can be daunting. That’s where working with a financial planner can help. But there are a few persistent myths that make some people hesitate to pick up the phone.

Here, we try to address five of the most common financial planning misconceptions.

Myth 1: Financial planning is only for the wealthy

Some people believe financial plans are just for wealthy investors who want to move large piles of money around. But the truth is, anyone who wants to set long-term money goals can benefit from a financial plan.

At its core, financial planning is just a tool to help you build a meaningful future. While the tactics might change, the fundamental strategies work for all ages and all levels of income. Your individual life circumstances matter more than your age or assets. That said, there’s no denying that the earlier you start, the better off you’ll be. Even for someone with few assets, the power of compounding interest can produce powerful results over the long run.

Myth 2: Saving 10% of my income is enough

We’ve all heard some iteration of this old adage. But the math seldom works.

Setting aside that magic 10% only works if someone starts saving at the age of 18 and continues without fail until they’re 65. Even if you happen to be supernaturally disciplined and dedicated to these savings, there’s no guarantee you’ll enjoy decades of consistent, uninterrupted employment.

Unexpected unemployment aside, you could suffer an illness, the loss of a residence, or any number of life changes that could come between you and that 10% number. That is why your actual savings target should be much higher.

Many people significantly underestimate the amount they need to consistently save to properly prepare for retirement – especially if they’re starting later in life. This is where advice from a certified financial planner can prove invaluable.

Myth 3: If I only spend 3-5% of my retirement account each year, I won’t run out of money

There’s a general rule of thumb that suggests withdrawing between 3% and 5% of your retirement savings each year, after adjusting for inflation. This approach is built on the assumption that you can normally expect a 4% return on your investments. Created in 1994 by financial advisor William Bengen, this rule has sustained almost 30 years, but it might not be realistic for you.

But that number isn’t set in stone. It obviously only works if you’ve set enough aside to begin with. And more importantly, it assumes a 30-year retirement. It all comes down to your circumstances and goals for retirement. When clients first retire, they can have expectations to travel and really live life to the fullest that they couldn’t do while in their careers. This might lend itself to having a bit of a higher distribution rate at first and then drastically decreases as they age.

A recent Harris Poll indicates that only 23% of current workers expect their retirement investments to last longer than 20 years. As lifespans continue to increase, this number becomes more problematic. It means investors who run out of money in their 70s and 80s are left relying on Social Security alone at a time when their healthcare costs are likely at their peak.

With the interest rate environment being at zero or almost zero since the financial crisis, there are some experts that the withdrawal rate needs to be drastically lower. Some even saying that 2.4% is the rate that investors should aim for. When your investments are not paying as much in dividends and interest, you are dipping more into your principal each year than in other times.

No matter the size of your investment account balance, the key to ensuring your money lasts is limiting the amount you take out each year. One common strategy involves basing your withdrawal rate on the IRS’s Required Minimum Distribution tables. It may mean taking less income than you’d prefer, but that’s better than running your account down to zero and being forced into potentially painful lifestyle adjustments.

Myth 4: Once I set up my financial plan, it’s on autopilot

There’s no doubt that working with a professional financial planner is the best way to navigate your financial future. It helps you reach your goals while also dealing with the inevitable surprises along the way.

But it’s not a “one and done” process.

In addition to those inevitable surprises, your goals and priorities may very well change over time. That’s why your financial plan should be periodically reviewed and updated to make sure you stay on track toward achieving your financial goals. At CapWealth, we suggest that our clients examine their plan annually as well as after or before any major life events.

Myth 5: A financial plan assumes I’ll retire at 65

There was a time when turning 65 meant getting a gold watch from your employer and cashing your Social Security checks. But things have changed dramatically over the years including the age at which people are choosing to retire.

According to the Employee Benefit Research Institute, just 25% of Americans between the ages of 45 and 54 are planning to retire at 65. The rest are fairly evenly split, with 40% expecting to retire sooner, and 36% expecting to retire later.

The point is that there’s no “one size fits all” template when it comes to retirement, or financial planning. Truth be told, there never was.

Is financial planning for you?

In a word, yes. Financial planning is for anyone who wants to achieve their financial goals – no matter their age or financial status. A properly executed financial plan covers every area of your financial life. And working with a professional financial planner will help steer your decisions in ways that will help you reach your goals.

So don’t be swayed by myths and misconceptions. Take charge of your financial future today.

Jennifer Pagliara, CFP, CTFA, is an executive vice president and financial adviser at CapWealth. For more information, visit capwealthgroup.com.