Published in the November 14 – 27, 2018 issue of Gilroy Life

Legendary author Edgar Allen Poe once stated that “stupidity is a talent for misconception.” While his statement can be viewed as humorous, careful analysis renders a verdict that most people do not desire this so called “talent.” This is especially true when tackling issues like planning finances.

Since financial planning involves a variety of topics like investments, insurance, taxes, and retirements, it is not uncommon for people to encounter fallacies or misconceptions about planning. Here is information related to five of the most common misconceptions to aid in smarter financial decisions.

  1. Electing to take early Social Security benefits while working

While some think they are getting ahead by electing early benefits, it is almost always better to avoid early social security withdrawals. Should you draw benefits early and keep working, your benefit amount can be reduced. This reduction takes place each year until you reach full retirement age (typically age 66 or 67). In 2017, benefits will reduce $1 for every $2 of earned income above $16,920. This is a substantial loss of benefits that could be avoided with proper planning.

  1. Taking Qualified Retirement Withdrawals before age 59 ½

Typically, this should be the last place you pull money from before age 59 1/2. Early withdrawal of qualified retirement money before 59 ½ causes a 10 percent early withdrawal penalty in addition to triggering ordinary income tax. Should you decide to retire early and want to start taking penalty free withdrawals before age 59 1/2, one should explore using IRS rule 72t. Under this rule, a person age 55 can elect to start taking retirement account withdrawals, avoid the 10 percent penalty, and satisfy required minimum distributions mandated by the government over one’s lifetime.

  1. Taxes will be lower in the future

While this may be true for some, it will likely not be true for most. Currently, taxes are historically low when compared to our nation’s growing debt. As taxes rise, consumers can expect all tax brackets to be affected. Over time, expect more tax deductions to be disallowed. With less tax-deductible expenses (i.e. mortgage interest, children, etc.) during later years in consumers’ lives, one should plan on being in a higher tax bracket to play it safe. Distribution strategies from taxable and non-taxable retirement income sources are often critical tools for stretching retirement dollars and reducing taxes.

  1. Maximizing Retirement Dollars with “Risk-Free” Investments

Risk Free Investments simply don’t exist. Whether you’re using vehicles that protect you from market losses or not, there is always some sort of risk associated with financial planning. Protected growth strategies are popular ways to protect accumulated wealth and fight costs of inflation. If investments aren’t keeping up with inflation, one’s ability to purchase goods and maintain their current lifestyle in retirement will dwindle.

  1. Long Term Care Coverage Subsidized by the Government

Many consumers perceive they do not need to plan for medical expenses later in life because the government Medicare or other subsidies will care for them. While subsidies are available given certain financial circumstances, one should be clear on the differences in program coverage and qualifications. Medicare helps cover acute care and hospitalization for people age 65 and older. Medicare does not cover long term care and has only limited coverage for rehabilitation. While government Medicaid does have some long-term care benefits, it covers only financially distraught retirees with little to no assets. Most will need to plan for this future need on their own and evaluate policies to help alleviate stress from medical costs.

Brian Harrigan and Bob Price are the owners of Executive Plan Design.  For more information on strategies to maximize your planning and a free consultation, contact them at (408) 767-2572.