The 7 Biggest Financial Myths and the Truth Behind Them

Peter, very good to see you.

Welcome back, everyone. I love it when we get to do a little myth-busting, which is what we're doing today. The seven biggest financial myths and the truth behind them. Some of the most common beliefs about money, retirement, and investing are myths, and believing in them can really hurt your financial future.

So we're going to break down the top seven today. Number one, the market always goes up. How do you help clients stay realistic about market cycles? And of course, we all want to be invested for the long run. Well, and investing is a long term proposition. We don't invest for just five days or right now. And I know there's day trading out there, but time tested investment success comes from a long term perspective.

That's not true. I mean, we have seen historical examples, the dot com bubble, the Great Recession, the COVID downturn, 2022, just to name a few times where the market has proven that it does not always go up. Now, given enough time, historically, the market has always come back or surpassed previous highs. So over time, the market has gone up, but it does not always go up. And so the the timing that you have in your life cycle and your need and necessity from your investment portfolio matters a lot. If you've got time on your side, you can kind of let things play out, even if there is market volatility volatility and a downturn.

You know, fantastic. Don't panic about those downturns. The market will eventually, as it has previously, not only come back, but surpassed previous highs. On the other hand, if you are in the midst of needing access withdrawals from those investment accounts, those downturns can be very negatively impactful. They can they can affect your entire trajectory of your financial future, especially in the red zone right before or right after retirement. And we don't know how long it takes for the markets to recover. 2000 through about 2010 and really extended out through the end of 2012.

They call it the lost decade. And it's not the only example of this, but it was an extended period of time where volatility really caused us not to see a whole lot of forward progress for more than a decade. Now, if you were putting money in during that time, you benefited.

If you were, on the other hand, retired and withdrawing, your retirement was not what it could have been and what you anticipated if your withdrawals and income were based on and dependent on the direction of the market. So just be cautious in in basically assuming that the market is always going to be cooperative in the time that you need it to be. It does not always go up. It has gone up over time, which are two different statements. Right.

All right. Myth number two. Maybe this is related to number one. You can explain the market averages 10 percent a year. Right.

And we're talking about myths here. And I've heard this number at eight. I've heard it at 10.

I've heard it at 12. Regardless of the number, don't count on averages as consistent. They are very different things. And an average can be wildly off the actual number, whereas being consistent is what I see a lot of plans depending on. Like you say, hey, the market has averaged 10 percent. Well, people's plans pretend like it's going to do 10 percent each and every year, that it's going to generate that consistently.

Again, two very different things. And I feel average rates of return are perhaps one of the biggest fallacies in the financial world, because averages do not tell an accurate story. If I had one hundred thousand dollars and I made a 60 percent rate of return and then lost 50 percent and then gained 20 percent over a three year period. And I know numbers over over the air are complicated, but plus 60 minus 50. That's 10 plus 20.

That's 30 divided by three. That is a 10 percent average rate of return over that three year period. However, the dollars going through that rate of return, your hundred thousand turns into one hundred and sixty falls back to 80 and then gains 20 percent.

You're at ninety six thousand dollars with a starting balance deposit of one hundred thousand dollars. You have actually lost money over a three year period where you had a 10 percent average rate of return. And this is why we cannot rely on averages when when you look back and say, well, this fund or this account has averaged this. That's not necessarily what the actual return on the dollars has been. And so we need to be very cautious about relying on averages, both in in what they mean for the actual return and the fact that an average does not mean consistently dependable. All right.

Next, we get to talk about one of my favorites. The four percent works for everyone in retirement. Yeah, four percent rule does not work for everyone in retirement. The four percent rule was was again kind of this loose, loose rule. This theory really that said basically everybody should just follow this kind of one model for how much income they can generate. And it proposed that you should be able to take four percent of whatever your inbound investment balances each year as a cash flow or start year one at four percent and then adjust for inflation each year.

Well, if you run those numbers in the Monte Carlo simulators or the Vanguard calculator is very famous for kind of do it yourself tools and calculators. What you find is that this four percent rule actually leaves about a nine to 10 percent probability of failure, meaning you run out of money over the expected lifespan in retirement. If the weatherman says that there's a nine percent chance of rain, I might feel comfortable leaving my house without my umbrella. But if my financial future, if my if if my financial confidence is based on a theory that leaves the probability of a 10 percent chance of failure, of running out of money, I'm maybe not so comfortable relying on that.

I'm trying to do everything I can to figure out how to eliminate that. And so, you know, we could probably discuss which tools can create and generate cash flow more effectively than others. But just blindly following this four percent rule or theory, even the guy who incepted it says that, A, it was always meant for institutional investment, meaning like pension funds rather than an individual, because a single individual, it either works or it doesn't.

And if it doesn't, it's catastrophic. And he also said that it sort of ignores the possibility of large losses in the first several years of retirement. It's a financial analyst by the name of William Bengan.

We've had him on the program. But yeah, I just thought blindly following a four percent rule and the numbers up on the screen here. They show a four percent return, but a five percent cash flow. But you see how different the end results are. Fifteen years down the road is like you can't just follow a rule of thumb and say it applies for every situation. That's that's the important thing to know about.

And then a myth that you and I have done is separate videos on Peter. My taxes will be lower in retirement. Yeah, that that is not actually written in the tax code anywhere. I wish it were. In fact, retirees, by and large, have all of the deductions that they may have had previously children and home mortgage.

Those are sort of wiped. They do get a little bit of a bonus on the standard deduction, which most people use these days. And Social Security, at least for the time being, not all of that is taxable. But generally, the tax brackets are pretty wide and people's income sort of falls into the same range that they're used to living off of. And so deferring and delaying paying taxes hasn't necessarily been a mistake because taxes have come down over the last 35 to 40 years. But right now, we are at a historically low tax rate and tax environment. And there is nothing that says taxes remain this low in perpetuity or into the future. In fact, 37 trillion dollars in debt says that at some point in time, they probably go up into the future. And Becky Swansburg from Stonewood Financial, she does tax analysis.

I've had her on my program. She cited that taxes wouldn't actually need to go up about 30 percent from where they are right now just to get back to historical averages. Going to that chart that you just showed there, taxes have been significantly higher and they would probably go higher into the future. So don't rely on them being lower in retirement than they are today.

The next myth. I don't need life insurance once I retire. I think this is a common misconception with a lot of retirees. Yeah, well, you're no longer replacing an income. The kids hopefully are raised and no longer on the payroll and not dependent.

Maybe the house is paid off and you walk away from your job, hopefully with the largest amount of personal wealth and life savings that you've ever had. It does lead to the thought that, hey, maybe I'm self-insured and don't need life insurance at this point in time. But over the course of 10, 15, 30 years, we have a habit of spending. And that lump sum that gave you that confidence, that's your source of spending. So that can be dwindled down over the years. You know, for me, I want to be able to spend confidently and enjoy retirement with my wife.

And the way that I'm going to be able to do that, to have that confidence, is if I give her a mechanism to refill the bucket in case we spend that money enjoying time together. I don't want to leave her with nothing or with with high health care costs bankrupting her when she's got several more likely years of healthy living after me statistic. So life insurance remains important in some form or fashion. And that's why there are different types of life insurance. And I'm a big believer in term insurance for younger people having other priorities, needing the biggest bang for their buck. Like term insurance is generally the right solution for the majority of our working career. For most people, unless you've maxed out all other kind of retirement savings opportunities, I think term insurance is generally the way to go. However, once you retire, life insurance can double for some long term care expense protection.

It's there permanently with with with certain types and it can grow for tax free withdrawals. So there is a time and a place for having the conversation about other types of insurance. And really, there's no time when life insurance is a useless tool.

Next, we have the myth. My investments alone will cover retirement. Yeah, well, and like an investment plan alone. So when we have money in the market, we talked about that four percent rule.

We talked about the market volatility. That's not reliable. And my bills stay about the same whether the market is up or down. Like my my electricity company and my utilities didn't call me. My insurance company didn't call me and say, hey, the market's down 15 percent. We're cutting your bill by 15 percent to reflect that.

That just doesn't happen. We need a consistent income in retirement. And therefore, a fluctuating source like investments in the market does not constitute a income plan for retirement dependability and durability. So we really need to have an income plan component to complement the Social Security. If you have a pension, fantastic. But generally, there is some extra that we're going to need to fill to cover living expenses.

And that should not exclusively rely on investments to do that. And then last, Peter, I'm sure you hear this a lot. I certainly do. It's too late to plan. I don't have enough.

I do hear that a lot, unfortunately. You know, a journey of a thousand miles starts with the first step. Some wise man once said you'll never get there if you don't take the first step. And sure, it would have been best to have taken that first step 20, 30 years ago. Right.

If you want shade, when's the best time to plant a tree? 30 years ago. But but if you have not yet taken the first step, when's the second best time?

It's right now. And wherever you're at, you can still regroup and assess and make improvements like there's nobody. I don't believe that is beyond hope and beyond the chance for improvement.

Everybody can even with small improvements. Right. There's the thing where if you make one percent improvement a day, you end up the year like 30 percent better than you were. That's that's all that it takes.

Right. It's just let's do one one thing at a time. Focus on one percent improvement. And suddenly, you know, six months, a year later, you've got a different, better perspective on your finances and outlook for your future. So don't think that it's too late. Don't think that you don't have enough. Like everybody can plan effectively and improve in certain areas.

So glad we got to talk through these myths and very common misconceptions. Peter, if this is making anybody feel like they might need a closer look at their investment plan, their income plan, their financial plan. What's the best way to reach you? Give me a call.

Nine one nine three zero zero five eight eight six nine one nine three hundred fifty eight eighty six. Or can visit online Roshan planning dot com. It looks like rich on planning dot com Roshan planning dot com. And it is not just your finance. It is your future. And your future is only as good as the assumptions that your plan is based on. So don't fall for these common myths or misconceptions like make sure to examine those assumptions and what your future is contingent upon. And make sure that you are making sound planning assumptions that if you're wrong, like things work out better than you expected, not worse than you expected.

Yeah, good point. All right, Peter, thanks for your time today. Thank you.

Hey, folks, Peter Roshan here with Roshan planning. So glad that you are enjoying the podcast Planning Matters Radio. You know, one of the tools that we've put out there that people really seem to appreciate and really are our finding of value is at nine one nine retired dot com. It is your retirement tax bill calculator. If you've got any kind of retirement account, your tax deferred 401K or IRA. This is the Web site.

This is the resource where you can go. You can plug in your own numbers, your information. You can slide the the tool calculator up and down for your tax rate or your amount of savings and see what your tax bill is likely to be. If you default and defer to the IRS's plan versus what you could potentially bring that tax bill down to a lot of times, it is a very significant savings.

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