The problem isn’t so much what people don’t know, the problem is what people think they know that just ain’t so.”
— Will Rogers
Remember when you were absolutely certain about something that turned out to be false? Like Santa Claus or the Tooth Fairy. Or how about the witch that hides under your bed waiting to attack so you have to flip the light switch then spring into your bed before she gets you? (Okay, maybe that one’s just me.)
In honor of National Financial Literacy Month, let me just debunk a few “things you know that just ain’t so”:
1. You’ll come out ahead by deferring your taxes, and that’s one of the prime benefits of retirement plans such as 401(k)s and IRAs
Remember Wiley Coyote? He’d come up with some brilliant, fool-proof plan to catch the Roadrunner, only to have it backfire and nail him every time! Deferring taxes is like sitting on a Wiley Coyote ticking time bomb.
What direction do you think tax rates are going over the long term? If you’re like most people I talk to, you probably think tax rates are going up, which means if you’re successful in growing your nest egg, you’re only going to end up paying higher taxes on a bigger number.
2. To build wealth and grow a sizeable nest-egg, you must be willing to accept risk
Just like doctors in the 1950’s promoted the health benefits of smoking cigarettes, Wall Street has been promoting the financial health benefits of risky investments since the 1980’s. “The higher the risk, the more you can make!” Yeah, right. And the more you can lose!
Ignoring the Wall Street hype, millions of Americans have implemented steadier, safer ways to build healthy nest eggs. Check out the safe wealth-building strategy called Bank On Yourself that’s never had a losing year in more than 160 years!
3. If you’re carrying debt, your priority should be to pay it off before trying to save money
Were you ever conned into putting your fingers in one of those Chinese finger traps? That little woven straw tube where the harder you tried to pull your fingers out, the more they got stuck?
Unless you already have a substantial stash of liquid savings, simply focusing on reducing debt leaves you vulnerable. Every emergency or unexpected expense will send you right back into debt, no matter how hard you’ve worked to pull yourself out. To get out and stay out of the debt trap, give equal priority to both savings and debt reduction.
4. After you retire, your basic expenses will be much lower
This reminds me of those perfect-looking models in magazines who’ve had every wrinkle, freckle and last bit of cellulite photo-shopped away. It’s a lovely illusion, but the untouched reality is not so pretty.
In whose universe will your expenses be less as you age? Your utilities, groceries, and home and car insurance costs won’t be less. And your healthcare costs are likely to be more: Studies show that a 65-year-old couple retiring today will need $220,000 to cover out-of-pocket health-care costs during retirement. (That figure doesn’t include possible nursing home and long-term care costs. And it assumes you do have Medicare.)
Unless your dream retirement is sitting on the sofa watching TV (with no cable channels!) eating peanut butter sandwiches, don’t count on your expenses being lower.
5. Fees associated with mutual funds are negligible compared to the returns that are possible
Reminds me of the Tooth Fairy: “Just give me your tooth and I’ll give you a whole quarter!” Sounds like a pretty good deal. But if you give her a tooth every year for the next twenty-five years, you end up with $6.75, a mouth full of nothing, and a glass full of dentures on your night table!
According to the Department of Labor, fees of only 1% can slash the value of your retirement fund by 28% over the next 35 years. Think you’re not paying that much? Check again. On average, participants in small retirement plans pay nearly 2% in fees annually, and participants in large plans pay 1.08%.
What other financial “truths'” do you know that just ain’t so? False notions that are undermining your financial well-being? Take our quick and fun What’s Your Financial IQ Quiz and find out.