Retirement Myths Debunked
Naturally, individuals are loss-averse. In 2002, Daniel Kahneman won the Nobel Memorial Prize in economics for his studies, suggesting that individuals feel (and fear) the pain of losses twice as much as they feel (and celebrate) gains. It’s no surprise, then, that many questions we receive as financial advisors deal with fear of losses. These fears are not limited to the stock market but include other areas, such as income and assets.
In many cases, these individuals are experiencing financial F.E.A.R. – False Evidence Appearing Real. Typically, their concerns have an element of truth, but additional insight is necessary for complete clarity. Below are four common F.E.A.R.s that trouble retirees:
1 – Social Security is going away.
On May 6, 2024, the Social Security Board of Trustees released its annual report on the financial standing of the Social Security Trust Funds. This status report noted that if Congress does not act, the Trust Fund reserves are projected to be depleted in 2035.
There are two important factors to note. First, the report also states that there would be sufficient income to pay approximately 83% of the scheduled benefits at that time. Remember, current payroll taxes (FICA taxes) are paying the benefits. Today, the expense (benefits) of the program is greater than the income (tax revenue), and thus the Trust Funds are declining. At the projected depletion, income would still be available to pay benefits, but it would not be enough to cover the total amount.
However, Congress could take at least two actions to fully cover the benefits: increase payroll taxes (create more income) or reduce benefits (cut expenses). In 1983, Congress increased the Full Retirement Age (FRA) from age 65 to age 67 over 22 years. Faced with the same issue once again, Congress is likely to act.
2 – The government will take away my retirement account (IRA, 401(k), 403(b), etc.).
When Congress passed the SECURE Act on December 19, 2019, many changes impacted retirement plan owners and their beneficiaries. More specifically, the SECURE Act eliminated the “stretch” provision for some beneficiaries. Previously, beneficiaries of IRA plans were allowed to take required minimum distributions over their lifetime, allowing for continued tax-deferred growth. Going forward, only “eligible designated beneficiaries” are allowed to “stretch” the retirement plan. In contrast, all other beneficiaries will be required to fully distribute the account balance by the end of the 10th year following the year of inheritance.
Let’s review an example. Larry, age 90, died this month, leaving behind his wife (age 85) and son (age 60). If his wife is named the primary beneficiary of his retirement account, she is considered an “eligible designated beneficiary” and can continue to distribute the account over her lifetime. On the other hand, if the son were to receive the inheritance, he would be required to distribute the account within 10 years.
In short, the government is not taking away your retirement account, but they do want to ensure that taxes are paid on the funds.
3 – We’re headed for a market crash. Should I buy gold?
On average, according to Dimensional Fund Advisors, the market declines approximately 14% each year. However, annual returns have been positive in 33 of the last 44 years. Even going back to 1926, “up” years have occurred much more frequently (74%) than “down” years. Only three times has the market ended the year down more than 30% (1931, 1937, and 2008), whereas it has ended the year up over 30% 17 times, with the market averaging gains of 10% per year!
Recognizing that we feel the pain of losses more significantly than we experience gains, it’s critical to have a strategy in place when bear markets arrive. Remember, markets are resilient, enduring wars, pandemics, financial crises, and many other events over the course of history. Investing requires patience and discipline. A financial plan will include a stress test of various market environments, so focus on the items within your control, such as the appropriate allocation among stocks, bonds, and alternatives.
Regarding gold, it’s important to examine your “why.” Are you concerned about economic collapse? Inflation? Bear markets? The answer to buying gold is slightly different depending on the fear, but it should always complement and not replace a defined and diversified investment strategy.
4 – Cash is going away.
The COVID-19 pandemic in 2020 marked a significant reduction in cash transactions. In 2019, cash payments accounted for 26% of all transactions, and in 2020, that number dropped to 19%, with little change since. As individuals stayed home and shopped online, there was naturally an increase in online payment transactions. Around that same time, Bitcoin began a steady rise, reaching a price of almost $64,000 on April 13, 2021, and leading many to wonder if a digital currency would replace cash.
Cash will continue to play a role for many reasons. As of 2021, an estimated 4.5% of U.S. households remain “unbanked,” with no checking or savings account. The digital economy remains at a distance for this portion of the population. Cash also allows for the anonymity of transactions, the opposite of many digital forms of payment. Chairman of the Board of Governors of the Federal Reserve System Jerome Powell recently spoke before the Senate Banking Committee and stated that the Federal Reserve is not “remotely close” to adopting a central bank digital currency (CBDC). Instead, the Fed is researching the technology to better understand the challenges faced.
The concerns above are genuine because they are rooted in loss, but a closer examination of the truth reveals these F.E.A.R.s to be misguided. Despite almost 100 years between us, the words of Franklin D. Roosevelt continue to ring true today. Entering the presidency during a banking crisis and economic collapse, Roosevelt’s inaugural speech contained these words:
“This is preeminently the time to speak the truth, the whole truth, frankly and boldly. …
So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself…”
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S., which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant.
Laura K. Rhoades
Financial Advisor
CFP®