By Daniel Sexton, CFP®
I am often amazed at what passes as sound financial advice. People have funny ideas about money and finance and they can come from almost anyplace…our parents, crazy Uncle Stan, financial magazines. I thought I would address a few of these financial misconceptions we have come across and give you the RS Crum take.
Only contribute the amount your company will match to your 401k
I have heard this many times and it has never made sense. The idea is if your employer matches 3% of your salary, then you (the employee) should only contribute 3% to your 401k. I guess at a gut check level this might make sense, after all “why should I put in more than The Man?” But, this completely disregards the tax savings of contributions. The tax savings are significant even for modest income earners.
Besides, there may be no easier way to save. It is automatic and the impact on your take home pay is much less than the dollars saved. For those who have difficulty saving, this is often the first place we look. Our suggestion (regardless of matching contributions) is to put in as much as you can afford, plus a little more, up to the maximum.
I have to make more to start saving
Snarky myth busting answer: You’ll never make enough. I say this with a sly grin, but there is some truth. The longer one waits the more one must save, and the more one has to save the more one has to earn. Repeat until broke. In truth, time can be your ally or a wicked master when it comes to saving. There are numerous studies showing how saving early outweighs saving later. People like me call this the compounding effect or the time value of money. Regardless of what it is called, the lesson is start early, start now.
Perhaps more important to understand is that saving is a habit. Everyone knows good habits are hard to learn, they take practice. Case in point, there is a fair chance you are slouching right now as you read this. Saving is the same; it needs to be practiced early, even if you start small. Waiting longer will not make it easier. For an easy way to start, see above.
My expenses will go down during retirement
At best this is a half truth. The typical line you might hear is to plan on spending 70% to 80% of your current or pre-retirement expenses. This seems reasonable because potentially there are several expenses that are reduced or go away during retirement. For example, a mortgage might be paid off, life insurance may no longer be needed or tax obligations might be lower.
However, what we find is that people keep spending what they have always spent, especially in the early retirement years. Retirees travel or indulge in their hobbies more, or spoil the grandchildren. If that were not enough, there is no end to the amount of things we can find to spend our money on. A short time ago, could you imagine anyone needing to own a tablet? It begs the question, what will tomorrow cost?
Only later in retirement do we see spending start to slow down. But even here we urge caution, as medical, home care and personal service spending often tend to increase. At RS Crum, we specialize in retirement planning and our experience suggests that our spending behavior does not change all that much, but what may change are the things we choose to spend it on.