Just more than half of Americans are invested in the stock market, and according to the U.S. Census Bureau, only 32% of Americans are saving for retirement in a 401(k). While people may think they’re following best practices to prepare for their futures and build their nest eggs, there are several common misconceptions that steer people in the wrong direction and set them back.
Here are the top 4 investing misconceptions that serve as barriers to building people’s retirement savings and overall financial security, as well as tips on how consumers can combat these misleading thoughts and take proven steps to grow their retirement savings.
MISCONCEPTION 1 – ALL FINANCIAL PROFESSIONALS ARE LOOKING OUT FOR YOUR BEST INTEREST
When people seek financial advice, they often take for granted that everyone they talk to has their best interest at heart. What most people don’t realize, however, is that there are two types of financial professionals–Fiduciaries and Non-fiduciaries.
Fiduciaries have a legal obligation to act in the best interests of their clients and typically get paid a pre-determined fee. Non-fiduciaries, which include brokers and agents at well-known “brokerage” firms, work on commission and aren’t subject to the same legal constraints.
The average investor may not realize that this subtle, yet important, distinction exists. Since a “broker’s” advice is sales-driven, they may focus on transactions and commissions and steer people toward financial products that are expensive and contain hidden fees that eat into their retirement savings. That’s not an option for someone who works within strict fiduciary guidelines.
HERE’S WHAT YOU CAN DO….
When you sit down with a financial professional, don’t be afraid to ask this simple question… ‘Are you a fiduciary?’ If they say ‘No,’ we recommend that you run—don’t walk—in the opposite direction. This is your money, and you should only work with someone who is going to put your interests first and help you steer clear of unnecessary, expensive investment fees.
MISCONCEPTION 2 – HAVING 401(K)S IN 3 DIFFERENT PLACES MEANS YOU’RE “DIVERSIFIED”
When people get a new job, they almost always leave the contents of their 401(k) account with their former employers. Over the course of a career–which in today’s economy often includes multiple job changes–this can result in having 3-5 different 401(k) accounts stranded in various financial institutions.
While leaving one’s 401(k) accounts at several different companies may seem like a way to diversify, in reality, it’s not diversification. The companies that manage each of the 401(k)s are probably investing your money in similar ways, and chances are each financial firm is hitting you with a slew of hidden investment fees. So the investor not only has all of their eggs in similar baskets, but they’re often paying fees in each of baskets that dramatically deplete their savings.
HERE’S WHAT YOU CAN DO….
It’s your money and you should take it with you whenever you leave a job. The best practice is to roll each 401(k) account over into an Individual Retirement Account (IRA) and consolidate as many 401(k) accounts as you may have into one IRA account. Doing this won’t cost you a thing, and then you can work with a financial advisor who can help you invest your savings in a way that is truly diversified, and, therefore, more secure.
MISCONCEPTION 3 – THERE’S ONLY ONE WAY TO INVEST IN REAL ESTATE
If you see some of your friends buying “investment properties,” you may they think that the only way to get into the real estate market is to become a landlord. But do you really want to deal with leaky toilets and cranky tenants? Few people know that there is another way to invest in an upbeat real estate market that is more diversified, with steady gains and no actual property management.
WHAT YOU CAN DO…
Talk to your investment advisor about index investing. The right advisor can help you invest in a portfolio of low-cost, index funds that include real estate investments. Since index funds are designed to track the entire market they represent, they offer more diversity, less risk, lower fees, and often higher rates of return than one could get by trying to flip even the most-revamped house in paradise.
MISCONCEPTION 4 – SAVING FOR YOUR KIDS’ COLLEGE IS MORE IMPORTANT THAN SAVING FOR RETIREMENT
Many parents who have to choose between putting money toward their children’s college savings funds and saving for retirement think that it’s better to invest in their child’s education. However, the fact is that students and parent can borrow money through low-cost college loans, but you can’t take out a loan for your retirement.
College savings funds, such as 529 plans, offer the advantage of tax-free growth, but often have high fees and limited fund choices. And, as the child gets closer to college, the funds always skew toward lower-yield investments. Other drawbacks of 529 plans are penalties for withdrawing money for non-educational purposes and reductions in possible need-based financial aid.
WHAT YOU CAN DO…
Don’t take the bait that a college savings plan is the best and only way to invest for your family’s future. In fact, there are other types of investments, such as index funds, that can help you not only gather money for education, but also make sure Mom and Dad have a secure retirement that the child will not have to supplement one day. Don’t be afraid to use low-fee college loans to pay for school costs, as your money could grow at a faster rate, and with lower risk, through low-cost index investing.