Financial Planning Myths

Myth #1:  I need to have some investments before I'll have a need for a financial planner.  

Investing is about one fifth of what financial planning is all about.  Financial planners also give advice about risk management and insurance, income tax planning, retirement planning and estate planning.  And to the extent that you don't reduce your insurance expenses and income taxes and develop the discipline to start saving the amount needed to fund your retirement, you won't have any investments to need advice about.

Myth #2:  I (or my stockbroker, or the managers of my mutual funds) can beat the market.

So can about half of all orangutans flinging darts at a list of stocks.  In any given year, there are many managers and investors who beat the market due to luck.  But over the long haul, very few active managers beat the market because of management fees and transaction costs, and because they are wrong.  The wonder is not that people like Warren Buffett and Peter Lynch exist, but that more of them do not exist.  Based on pure probability, there should be hundreds or thousands more like them, but there are not.  Why is that?  The market is a giant, efficient pricing mechanism that instantly incorporates new information into securities prices.  Since all known information and all expected future events are already reflected in securities prices, prices are fair, and very few abnormal profit opportunities exist net of expenses (or at least you can't take advantage of them).  What causes prices to change is new, unexpected information reaching the market.  Since no one can consistently predict the future, no one can consistently beat the market, unless they are lucky and repeatedly guess correctly.

Myth #3:   My estate won't be subject to estate tax.  

While that will probably be true for the first spouse to die, it may not be true for the second spouse to die, especially if either of you owns a lot of life insurance.  The estate tax on taxable estates over $2 million is 45%.  With a little planning, however, this tax is completely avoidable.

Myth #4:  My estate will pass according to my will.

If your will is valid, it will only cover your probate estate.  Jointly-owned property, retirement plans and life insurance proceeds are not covered by your will.

Myth #5:  All of my insurance is in order.

I have yet to meet a client who did not have inadequate limits, unnecessary coverage or inappropriate deductibles.  Additionally, consumers are generally unaware of all the factors that need to be considered for each type of policy.

Myth #6:  I'm saving enough for retirement.

Most Americans aren't, and most underestimate the amount of money they'll need.

Myth #7:  If something happened to me, my family would know what my wishes would be.

Unless you've discussed your wishes with them in detail and put them in writing, chances are they wouldn't.

Myth #8:  Social Security will provide most of my retirement income. 

For 2007, the maximum Social Security benefit for people who retire at full retirement age is $2,119 per month.  Additionally, the system is totally unfunded, and as of 2007, the present value of unfunded liabilities facing the federal government after taking into account all expected future revenue was $90 trillion.  This figure will get larger as time passes and no provision is made to fund promised benefits, especially since these unfunded liabilities are increasing by $300 billion per month.  Additionally, the courts have ruled that you do not have a legal right to the benefits that have been promised to you.  Your benefits are whatever the current Congress and president decide they will be, as limited by what they can afford to spend.

Myth #9:  I don't need to save for my retirement because I'm going to die young.

So what will happen if you don't die young?  What's Plan B?  With advances in health and science, some futurists are predicting that many people alive today will live to be over 100.  

Myth #10:   I can't afford a financial plan right now.  

Perhaps part of the reason you think you can't afford one is because you're paying too much in insurance premiums, income taxes, interest and investment expenses, all of which a financial planner can help you reduce.  And fees you pay for investment advice and tax planning are tax deductible.  Hiring a competent and ethical fee-only financial planner to write you a comprehensive financial plan will probably be the best investment you will ever make. 

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