Avoiding these three pitfalls can help you pursue a more secure financial future
Few financial planning topics are more misunderstood than retirement. In this article, we debunk some of the more common myths we hear from investors.
MYTH: “NOW IS NOT THE RIGHT TIME TO INVEST.”
The key question isn’t if it’s a good time, it’s do you need to invest to achieve your retirement goals. If you do, you really only have two choices. You can put your money to work now and stay invested according to a plan. Or you can make sacrifices later, which may include spending less, working longer or becoming dependent on others during retirement.
When viewed in that light, the decision to get invested may become clearer, but it’s still tempting to wait for that “perfect” moment to take the plunge. The problem is, it’s almost impossible to correctly time the market. You’re just as likely to miss a good day as a bad one.
That’s because the market’s best and worst days are often close to each other. In 2015, for example, the best day came just two days after the worst.1 If you sold right after the low, you missed out on the high.
One of the best ways to take that guesswork and emotion out of investing is to contribute the same amount on a set schedule, regardless of market conditions. This practice, known as “dollar cost averaging,” helps you buy more shares when prices are low and fewer when prices are high.
Get invested, stay invested: The impact of missing the market’s best days
Returns of the S&P 500
Performance of a $10,000 investment between January 4, 1999 and December 31, 2018
Source: J.P. Morgan Asset Management, Guide to Retirement 2019
TIPS FOR STAYING INVESTED THROUGH CHANGING MARKETS
- Acknowledge your feelings. Market volatility can be unsettling; it’s normal to worry about it.
- Be flexible during downturns. Look for ways to spend less if you’re already retired or invest more if you’re still working and stocks are “on sale.”
- Maintain an emergency fund. It may keep you from dipping into retirement accounts when markets are low.
- Remember your time horizon. If you won’t need the money for years, give it time to recover from any setbacks.
- Don’t go it alone. Before making any rash decisions, talk to a professional advisor, spouse or partner, trusted friend or family member—anyone with your best interests in mind.
MYTH: “I’M TOO YOUNG—OR OLD—TO INVEST.”
Younger people may not realize the cost of waiting to save, which is normal because, by definition, they don’t have as much experience as older investors. At this stage of life, it’s critical to start early and give yourself more time in the market.
That extra time may mean more compounded investment growth, which is what happens when your returns earn their own returns. It also allows you the option to invest more aggressively for higher return potential in your younger years, before gradually shifting to a more conservative portfolio as account values rise and time horizons shorten. To get started, take a thoughtful look at your finances and figure out how much you can afford to save on a regular basis.
Save early and often: Making up for lost time may be harder than you think
Alan invests $100 a month for 40 years. Bill waits 20 years before starting. If they both earn 10% annual returns, how much more will Bill have to invest each month to retire with the same amount as Alan?
The most common answer is $200, but in reality Bill will need to invest $773 more than Alan to save the same amount for retirement.)
Source: Misunderstanding savings growth: Implications for retirement savings, McKenzie & Liersch, 2011
If you’re already near or in retirement, think about how much longer you might live. What if you or your spouse lives to 90 or 100? Will your money last that long? A typical retiree still has plenty of time to invest part of a portfolio in stocks and other long-term assets with the potential to keep pace with inflation and healthcare costs.
No matter what your age, be careful to avoid “sequential saving”—investing for one goal at a time, based on when you’ll need the money. It’s common, for example, for people to first save for a house and then for college before finally getting around to saving for retirement.
"When prioritizing your goals, think about what matters most, not what comes next. If being financially secure throughout retirement is important to you, you need to make savings a priority now."
We recommend working with a professional to create separate plans for each goal. Determine how much you’ll need and how much to invest each month. Then revisit your plan regularly to make sure you stay on course.
MYTH: “MY TAXES WILL BE LOWER WHEN I RETIRE.”
The number one surprise we see among retirees is that their taxes aren’t actually lower, especially if they only have tax-deferred accounts. Diversifying from a tax perspective gives you more flexibility and control over your taxable income in retirement, which also affects Medicare premiums and after-tax Social Security benefits.
For example, in addition to owning tax-deferred IRAs and 401(k)s that postpone taxes until retirement, you may want to put some money into tax-free Roth accounts if available to you. With a Roth, you’re essentially prepaying future taxes at today’s rates, which creates a level of certainty that can benefit you both financially and psychologically.
So which types of accounts are right for you? Every investor is different, but these general rules of thumb often apply:
- Early years: Invest in Roth accounts and pay taxes now when your income is low.
- Middle years: Invest in a healthy mix of tax-deferred and tax-free accounts.
- Later years: Invest in tax-deferred accounts during your peak earning years and put off taxes until retirement, when your income may be lower.
Once you reach your 60s, consider converting part of your tax-deferred accounts to Roths each year to steadily build up your pool of tax-free retirement dollars. One idea is to convert just enough each year so that the income from the conversion doesn’t push you into a higher tax bracket. Speaking to a tax professional can help clarify these options.
Taxable accounts should also be part of the mix, especially if you own stocks or other investments generating long-term capital gains. In tax-deferred accounts, those gains may be taxed at higher rates as ordinary income when withdrawn, which means you’d keep less of the earnings for yourself.
“The number one surprise we see among retirees is that their taxes aren’t actually lower, especially if they only have tax-deferred accounts."
Finally, think about your goals when deciding among retirement accounts. Some make more sense if you plan to spend the money yourself, while others are better suited for leaving to future generations.
NEXT STEPS: EXPLORE TWO WAYS TO INVEST FOR RETIREMENT
- Talk with a dedicated J.P. Morgan Advisor about using our goals-based planning approach to save for retirement while also meeting other financial needs.
- If you prefer to invest on your own, check out the helpful resources available through You InvestSM and our retirement planning webpage.
Not all investment ideas referenced are suitable for all investors. Investing involves market risk, including the possible loss of principal. There is no guarantee that investment objectives will be reached. Diversification/asset allocation do not guarantee a profit or protect against a loss.
Opinions and estimates offered constitute our judgment as of the date of this material and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described herein may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
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