What piece of financial advice or tool do you think is outdated, but investors still use, and why?
When I look at this question, more than one issue comes to mind. So I will provide a few.
One outdated bit of financial advice could be the old 60/40 model for investing. That is investing 60% in stocks and 40% in bonds. In theory, this sounds like a stabilizing approach, but in reality, many investors would be much better off in good growth stock mutual funds. The 40% in the bond portfolio has likely dragged down the returns over longer periods of time.
And in many cases has not provided the expected or desired lack of volatility.
While not appropriate for everyone, there are variable annuities and fixed index annuities that provide better than 4% and perhaps should be considered for income needs.
Another piece of financial advice that I hear often is that Social Security recipients should wait until 67 or even 70 to start their Social Security income to maximize their income.
In reality, this should be dealt with on an individual basis. It should be carefully considered with planning and knowledge of all the details and implications.
If someone retires early, say 63 to 65, and needs the additional income, they most likely should go ahead and start Social Security. They should go over this with someone who can help them with their numbers and then inform them of the consequences. In addition, sometimes people start taking it too early and have to pay a substantial penalty because they’re making too much income. My advice would be to get help from a financial advisor or other professional who has your interest at heart and will give you all the facts before you make this very important decision.
A general rule of Social Security income is that a recipient will get approximately the same amount of money whether they start at 63 or 70 for a 15 year period, or in this case, until age 78. If the money is not needed in the ages of 63 to 70 and income allows, the person could invest the money and have it for later use. Also, because a person does not know how long they’re going to live, it may not be advantageous to wait. Again, I think careful planning and knowledge are essential.
I believe the 4% rule for retirement withdrawal is outdated. I think instead it should be carefully planned. The portfolio should be tailored to the client’s needs.
Historically, there are many portfolios that have averaged between 7% and 10% and even higher. Good planning will consider the client's needs as well as their risk tolerance.
Just a rule of thumb is not good enough, as it could unnecessarily affect the quality of life during retirement.
Another outdated bit of financial advice is just use a S&P 500 index fund because nothing can beat it in the long-term. The facts say otherwise, especially if the advisor has a fee coming out of your S&P 500 fund.
Work with an advisor who is willing to work for you and find mutual funds or other investments that have outperformed the S&P 500 and are customized to your needs.
- A person’s retirement should never rely on outdated financial advice. Rules, change, opportunities, and circumstances in people's lives change. Therefore, they need to either be incredibly informed and on top of things or work with a good financial advisor or planner who has the heart of a teacher. This could improve their peace of mind and their retirement years.
In order to avoid the mistakes of old, outdated advice, it is important to work with a professional you trust and who has the heart of a teacher.