Common Financial Myths

People are told that they'll be in a lower tax bracket when they retire. That only hap-pens if their taxable income falls at retirement. Since the goal of most people is to retire at an income close to what they had before retirement, those who are successful may not fall to a lower tax bracket. That's especially true for those who have done most of their savings in programs that defer tax until retirement. Furthermore, even if our bracket is lowered, it's quite possible that the tax rates for our brackets will be higher than today - perhaps much higher.

There's a common belief out there that putting money into an IRA or 401(k) creates tax savings that can be spent or invested currently. However, when we show clients how these programs really work they quickly realize that much of their tax savings is not savings at all, but rather just putting off payment of the tax to some future date.

Compound interest is often considered one of the miracles of the financial world because the longer the money is compounded the steeper the growth curve gets. Unfortunately, for many people that's only part of the story since their taxable compounding strategies often create unnecessary expenses to occur in other parts of their financial world, and those expenses also compound over time. The net result is considerably less than what people have been led to believe, and seeing the whole iceberg is much more important than just seeing the part that sits above water.

Most people buy life insurance to protect their families when they are young. They want to make sure that if they die prematurely, there will be money available for last expenses and emergencies, college education and weddings, as well as to pay off mortgages and debt and replace the income that would have been earned had the per-son not died. Odds are that many, if not all of these reasons will reduce or even disappear as they get older so they believe they won't need it anymore when they retire. Un-fortunately, nobody bothered to tell them that there are some major negative impacts on their retirement income choices if they drop the policy when they retire that could not only reduce their retirement income but actually increase their taxes.

It is true that a shorter term mortgage will usually save the consumer a substantial amount of interest over time compared to a longer term mortgage. Again, there's more to the story than meets the eye. Paying a mortgage off earlier means more cash flow has to go to the payment each month. To do the comparison correctly, we have to study not just the interest savings, but the difference in cash flow, the difference in tax deductions and the value of those items over time. Looking at the whole picture in-stead of just part of it helps our clients make better decisions with better results.

When people put money in the market, they usually understand that the value of their assets will fluctuate over time, and they're usually OK with that because they believe that the average return will work in their favor. Unfortunately, the average return of an investment is often very different from the return people actually get because their individual rate of return is affected by the timing and amounts of their deposits. This is also true when people retire and disinvest from the market, but there is a tremendous difference in the impact of market fluctuations on disinvesting, and most consumers have never been made aware of the devastation it can cause to their wealth.

So much emphasis is placed on rates of return these days. It's the center of conversation with most financial professionals as well as in many magazines, newspapers and radio and television talk shows. While rate of return is important, it typically pales in importance to rate of savings. For most people, an increase in the amount of money they save each year will be worth far more to them in the future than a higher rate of return on their savings and investments.

One of the primary reasons that people fail to protect their balance sheet is the belief that they'll have to sacrifice lifestyle for protection. For most of our clients that's simply not true. Often we are able to find ways to give them substantially more protection and better forms of protection without the necessity of reducing their lifestyle or future net worth.