The 10 Most Common Financial Planning Myths

After practicing for over 30 years in the financial industry, I decided to expose some common myths that I’ve repeatedly heard over the years.  Here are the top ten:

  1. “I can retire when I save $X dollars.” (How do you know that?  See below for further discussion on this point.)
  2. “Bonds are a safe investment.” (Oh, really? Have you seen what they’ve done lately?)  Bonds have different risks than stocks, but they still have risks.  There’s interest rate risk, inflation risk and risk of default.  As interest rates and inflation rise, bond prices fall.  That means your “principal” or amount paid when purchasing the bond will drop.  If you sell your bond to get a better interest rate, you may recognize a capital loss on the original bond.  The reverse is also true.  Your bond’s value will rise when interest rates drop, because your bond will have a higher interest rate than what can be purchased on the market.  The risk of default is not to be poo-pooed, especially when we see state after state going bankrupt.
    3.       “Once you retire, you’ll spend about 25% less than when you were working.” I have yet to see anyone’s cost of living drop that much after retiring.  Usually the same amount of money is just spent in different ways.  In some cases, health care and assisted living costs can considerably increase post-retirement expenses.
    4.       “I trust investing in real estate. I know where it is and it always increases in value.” Now we all know better, but a few years ago we couldn’t imagine real estate prices dropping so dramatically.  The amount of time it now takes to sell property is much longer than normal.  The biggest problem with real estate is that it is illiquid, meaning you can’t readily convert it to cash.
    5.       “You should have a (pick your percentages) XX/YY portfolio allocation when you retire.” How can anyone know this without knowing your entire financial situation?  Each investor’s risk tolerance, timeline and goals are different, as are their intentions for their future lifestyle.  The other main factor influencing an asset allocation is the amount saved.  A long-term saver can afford to take less risk (own less in equities), whereas a late saver may need more growth to make their savings last longer.  Other sources of income such as pensions and post-retirement employment also need to be taken into account.  There is no one size fits all.
    6.       “Your tax rate will be lower in retirement because your income will decline.” Hmmm….I know some corporate executives who paid off their mortgages, no longer itemize deductions, and receive the same or more retirement income than they did when they were working.  And let’s not forget that the tax brackets have a way of moving up and down too.
    7.        “My financial situation is really simple and straightforward.” You may think so, but when a qualified professional reviews it, they may see opportunities for improvement or danger zones you haven’t noticed.  I often wonder if this is how a prospective client tries to persuade me to quote them a low fee.
    8.       “I don’t need a financial advisor. I can do it all myself using online calculators.  I keep up by reading a lot of financial magazines.”  You might do a great job, but then, how do you really know for sure?  A trained professional with on-going continuing education across the spectrum of income tax planning, cash and debt management, asset allocation, investments, insurance, retirement planning and estate planning can best objectively evaluate your finances in an integrated manner.  He/she can look at how various aspects influence one another.  He/she can identify strengths and weaknesses and recommend appropriate actions to take.  Plus, all those talking heads on TV and even in some magazines are focused on the latest hot tip.  A Certified Financial Planner® Professional will help you design a course of action that makes sense for you for many years to come, adjusting along the way as needed.  A professional can help you focus on what counts, not on the noise.
    9.       “All financial planners just want a piece of my money.  It’s all boils down to investment returns anyway.”  As noted above, the financial planning process as defined by the CFP Board of Standards covers a lot more than just investment advice.  It involves a six-step process:  gather client data and goals, analyze and evaluate the client’s financial status, develop and present recommendations, implement the recommendations and monitor the results.  In addition, an unlicensed person may hold themselves out as a financial planner.  A Certified Financial Planner® practitioner must the CFP Board exam, continue their education requirements and uphold the standards of integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence.  Some may charge a commission, while others are fee-only.  That is, they may charge hourly, by retainer or as a percentage of assets under management.
    10.   “I can’t afford to pay for advice. I don’t have an extra dollar to spare.”  Perhaps the reason you can’t afford financial planning is that you may not be managing your money as well as you could.  Perhaps you really need professional advice.  In the long run, those who use Certified Financial Planner® professionals reach their goals more often and more quickly than those who don’t.

To discuss Myth #1 more fully, when I hear someone say that a million dollars (or any another number) is the exact amount you need to retire, it betrays a lack of understanding.  First, many facets of your financial life tend to change both before and after retirement: inflation, deflation, tax rates, market returns, health care costs, family situations, etc.  The “magic number” is going to change right along with them.  What if you decide to relocate and the cost of living is different?  What if you get divorced?  What if your spouse or partner dies, and you don’t receive their pension?  What if your deceased spouse never updated his/her will and the estate goes to a previous spouse or children?  What if you suddenly face a serious medical condition that isn’t fully covered by your insurance?  What if you need assisted living and don’t have long-term care insurance?  What if a parent or child falls on ill health or hard times and you want to help support him/her financially?

The fact is, there are no certainties about our financial futures, only many changing variables.  Those who go forward alone, face those doubts, situations and decisions alone with limited resources.  They may make decisions based on emotion, not professional experience and training.  Others avail themselves of advice from a Certified Financial Planner® Professional.  Their futures are just as uncertain, but they have seasoned guidance to help steer their boat on both calm seas and through rough waves.  Their CFP® practitioner is required to objectively put the client’s interest first at all times.  Which way would you rather proceed?

One last (nonfinancial) myth: “You’ll catch cold if you go out with wet hair.”  When I was a teenager, hearing my mother say this again and again drove me nuts.  Since then, medical evidence disproved her mantra.  Now, I’m old enough to appreciate the concern she showed for me.  Where would I today be without having Mom through life?  As I said, things are always changing in ways we can’t foresee.

About the author

Constance A. Stone, CFP®


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