We’ve all heard myths about a Sasquatch running wild in north Georgia and a Loch Ness type monster washing ashore off the Golden Isles. Truth or fiction might be easy to distinguish there, but what about financial myths? Believing some myths could hurt your financial health.
Here we debunk the top 3 financial legends and reveal the truth behind the myths.
Myth No. 1 – You need to save enough money for your retirement so you can spend close to your pre-retirement salary each year.
How much money do you really need for retirement? Most experts advise that you have enough set aside in total so that you can take out 80% of your final pre-retirement salary for spending each year until death. This assumes retirement at age 65 and death about 30 years later. It also assumes that your spending remains the same each of those years. That figure doesn’t take into account Social Security or other funds to which you might become entitled.
In reality, most people spend more the first years following retirement when they are still active, and then progressively less as they age. Entertainment, travel, and other costs for an active lifestyle tend to dwindle as retirees age. According to the Bureau of Labor Statistics, mean annual spending for 55-to-64-year-olds was $65,000 in 2017, then fell to $55,000 from ages 65 to 74, and dropped to $42,000 annually after that. https://www.bls.gov/cex/2017/combined/age.pdf
Talk to your financial planner or accountant. If you’ve planned for a steady draw from retirement age to death, it might be worth reexamining that figure.
Myth No. 2 – No debt is good debt.
While maxing out your credit card to buy a designer handbag or taking out a loan to purchase a car worth more than you make in one year aren’t smart financial decisions, carrying some debt might make good financial sense. Mortgages to help you purchase a home or invest in other property might actually improve your financial position by diversifying your investments. If you are taking out a mortgage to purchase rental property, your investment is actually adding to your revenue stream. Your financial advisor or accountant can help you evaluate expenses and set a budget to determine whether property investment and a mortgage make sense.
Student loans, at accredited institutions and within reasonable amounts, are also usually considered good debt because they fund your education and ultimately can help you obtain a higher paying job.
Myth No. 3 – You have to be rich to invest in the stock market.
If you aren’t in major debt and you have set aside an emergency fund equal to three- to six-month’s worth of expenses, then you likely can also be investing in the stock market. A number of investment firms offer no-minimum or small minimum balance options. Fidelity and Schwab offer zero-minimum-investment options. Other investment firms have minimums in the low hundreds of dollars, like etrade.com.
Once you have opened an account, set aside an amount to regularly invest. Reevaluate this amount annually with your CPA or other financial advisor.
If you have questions about budgeting, retirement, or financial projections, contact us today. We are here to help!