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The Easter Bunny is Nothing Compared to These Retirement-Planning Myths

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easter-bunny-girlThe Easter Bunny is a cute myth for little kids, but we expect them to grow out of believing it. Other myths are perpetuated and linger on with large numbers of people throughout their adult lives.

A lot of myths are harmless. When it comes to financial myths, however, there is a lot more at stake than knowing who really left that basket of chocolates at the foot of your bed. Sadly, some financial myths are believed -- and even promoted -- by financial professionals and commentators.

These six retirement-planning myths persist mostly because they represent simple answers to complex questions. In reality, there are few things more dangerous than a simple answer to a complex question. The more you understand the detail behind these myths, the better able you'll be to judge how they apply to you.

6 retirement-planning myths

Here are some of the most common financial myths about planning for retirement, and the real information that can help you plan correctly:

Myth No. 1: Normal retirement age is 65

The idea of a normal retirement age probably began at a time when the social security system set 65 as the retirement age at which participants were entitled to retire with full benefits. However, this is no longer true of social security benefits, and the social security rule is a poor guideline to use for other retirement savings.

Though 65 was for many years the age at which people became eligible for their full social security benefit, in 1983, changes were put in place to gradually bump this up to age 67. Even this adjustment does not reflect the degree to which things have changed since social security was originally enacted.

When the Social Security Act was signed by President Franklin Roosevelt in 1935, the average life expectancy in the U.S. was 61.7 years. Now it is 78.9 years. This 17.2-year increase in life expectancy suggests that there ought to have been a proportionately large increase in what is thought of as "normal" retirement age -- and certainly a larger adjustment than just bumping that age up by two years.

The risk of continuing to consider 65 as a normal retirement age is that it leads to the possibility of a very long retirement period, which increases the risk of running out of money.

Myth No. 2: You should hold off on collecting social security to collect maximum benefits

You can begin collecting a reduced social security benefit at age 62, but the amount of your monthly check will increase the longer you delay beginning to receive social security up until age 70. However, waiting for that bigger monthly benefit doesn't necessarily mean you come out ahead.

Remember, if you hold off on receiving your benefit till age 70, you miss out on several years when you could be receiving a monthly benefit, albeit a smaller one. Thus, delaying the start of your social security benefits amounts to a bet that you are going to live long enough for the additional size of your monthly benefit to make up for all the years you delayed receiving a benefit.

What is right for you, then, is a judgment call that should factor in your health, family history and whether you have a spouse who could be eligible for a survivor benefit after you die.

Myth No. 3: Required minimum distributions will help you pace your retirement spending

Required minimum distributions (RMDs) are designed for you to gradually draw down certain retirement plans over time. However, this won't necessarily result in even distributions over the course of your retirement. So, for budgeting purposes, it is best to use a formula that will preserve your assets for as long as possible.

If possible, then, it is best if you don't spend the full amount of required minimum distributions as soon as you receive them. Even though you have to give up the tax benefit of having that money in a retirement plan, there is still some merit to saving some of it for future use.

Myth No. 4: Reaching your savings goal by retirement means mission accomplished

Retirement planning often focuses on reaching a certain dollar goal by the time you retire, but the really tricky part of retirement planning starts once you retire. That's when you have to start conserving your financial resources for the duration of your retirement, a job that is made all the more difficult by not knowing how long you will live. One odd thing about retirement planning is that living a long life is actually a form of risk.

One key to managing your financial resources throughout your retirement is to make regular adjustments as you see how events are playing out. So, retirement planning is an ongoing process even after you retire, not something that is completed once you reach your retirement savings goal.

Myth No. 5: You should direct all savings into a retirement plan because of the tax savings

Tax savings are nice, but tax-deferred plans generally come with a penalty if you take the money out before reaching age 59 1/2. So, while you should take advantage of the tax features of a retirement plan, be sure to keep some reserve of money outside the plan for short-term needs or emergencies.

After all, if you find you have to access money from a retirement plan early, you'll have to pay ordinary income tax on that money anyway, with the likelihood of an early withdrawal penalty on top of that.

Myth No. 6: 4 percent a year is a safe spending rule

It's an old rule of thumb among financial planners that you can spend 4 percent of your savings each year and your investment returns should be enough to maintain the value of your assets. However, there are a couple of problems with this assumption.

First of all, few people have enough retirement savings that they can afford to live on just 4 percent of those savings per year. Realistically, most people have to plan on drawing down their retirement savings over time, though they should do so as slowly and prudently as possible.

The other problem is that this rule of thumb dates back to a time when government bond yields were in the mid-to-high single digits. Now that those yields are in the 2- or 3-percent range, it is much more difficult to consistently earn investment returns that would make up for 4 percent annual withdrawals and allow your savings to keep up with inflation.

There is a lot of magic and wonder around a myth like the Easter Bunny, and that can be a good reason to perpetuate it. But these retirement-planning myths can be detrimental to your finances. Next time you hear one of these myths, don't take it at face value. Investigate it; don't perpetuate it.

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