This is the final instalment of the three-part series on retirement planning and investing.

“Retirement at 65 is ridiculous. When I was sixty-five I still had pimples.” - George Burns

Retirement planning lore is littered with conventional wisdom, heuristics and rules of thumb. Unfortunately, many of these are dead wrong or far too simplistic. For example, maybe you believe you can put off planning for retirement or saving till later after “life settles down”. Maybe you’ve been told that you only need 70 percent of your current income in retirement, or you just need to save ten times your salary. Or maybe you have been told to take “average” historic returns to forecast your funds in retirement. Maybe you believe that you have to play it extremely safe with your retirement funds and only invest in CDs and bonds.

If you believe any of these statements it would be a good idea for you to read on. Your retirement outcome may depend on it. What you are unaware of can really hurt your chances of having a successful retirement. Below are a few common myths and misconceptions associated with retirement planning:

1: I’ll start saving later when it’s easier and I have more money

It may be true that it is easier to save for retirement in later years when you are making more money but that may not be the easiest way to secure a sound financial position. First of all the weight of procrastination is heavy. If you can find excuses not to save today it’s likely you will have other excuses in the future. Saving and taking responsibility for your future requires some planning. In Bermuda, the mandatory ten percent pension allocation helps to instil discipline. However, it’s incorrect to assume that by simply doing this alone your retirement is guaranteed; in fact it may require a lot more in additional savings depending on your circumstances. Saving additional amounts earlier rather than later will allow the power of compounding to help you save more over time. Alternatively, if you wait until the mortgage is paid off and the children are out of college to start saving you may find you’re running out of time. Take a simple example. If you saved an additional $5,000 starting today for the next 10 years compounded at five percent and stopped saving after ten years, in 20 years you could have about $108,000. If you put off saving for ten years and then saved for ten years you would end up with only about $75,000. The cost of procrastination in this example is about $33,000.

2: I will need only 70 percent of my pre-retirement income during retirement

The truth is that the amount you spend in retirement is a unique and complex equation for each individual. Rules of thumb like 70 percent of retirement spending are actually deceptive in nature and fail to suggest a more detailed approach is required to plan your future. A recent Aon Hewitt study, suggests (including social security) one needs 85 percent. The Society of Actuaries reported in 2011 that “consumption replacement rates are somewhat bell shaped around 100 percent”. There is no real guaranteed rate for success because some people’s plans in retirement are very active. In fact, some plan on filling their work time with travel time which may end up costing them even more than anticipated. It’s also important to note that you may expect your spending in retirement to decrease over time as you age due to less activity, but you can also expect spending to increase as you age due to inflation and healthcare costs. The more conservative and prudent option is to put together some form of budget based on your own personal situation and goals for retirement. Include stress-test scenarios and various inflation assumptions. Basically, talk to an adviser and ask them to help you work through a comprehensive plan.

3: To lower your risk and preserve capital only invest in commercial deposits and bonds

If we all were to have short lifespans and inflation was guaranteed to be tame, it would likely be prudent to invest this way. However, this is simply not the situation faced by retirees today. Having enough money for 10 or 15 years of spending probably doesn’t cut it unless you plan on retiring at age 85. Today’s retirees can expect to live in retirement far longer than ten years and could be looking at time spans of 30-plus years. This length of time could see balances eroded by inflation which would actually increase the risk of this type of portfolio. Inflation of four percent per year could cut your purchasing power in half by about 18 years which means you will need to double your money just to break even! It’s important to not only preserve capital but preserve purchasing power. For example, had you retired in 1975 with a million dollar all bond portfolio and withdrew $65,000 per year indexed to inflation; you would be out of money in 19 years. Had you invested in a moderate portfolio, you would be worth about $700,000 at the end of 2012. This isn’t to say one should tilt the portfolio 100 percent into equities either as this allocation would subject the retiree to a great deal of volatility which can be equally as bad if not worse to portfolio longevity. The main key is balance between asset classes to optimise longevity and the chance of a successful fully funded retirement for decades to come.

4: Retirement planning is all about money

Of course it’s not. Money is always a means to an end. To be fair it is a crucial and essential element of the planning process but there is a lot more to a retirement plan than simply counting dollars. Retirement is ultimately a lifestyle choice which one should try and optimise based on fulfilling one’s emotional needs and concerns. Advisers should help you focus on your own personal life issues and concerns that matter to you. The retirement plan needs to consider life transitions, family issues, health challenges and other aspects that the ageing process brings about. It should focus on filling the gaps clients have in their current situation and what they envisage as their perfect or ideal situation. Lifestyle goals need to be matched with financial resources.

I hope this three-part series helps you begin thinking about your retirement plan and goals. I hope it encourages you to really focus on implementing and planning for 2014. I wish you happy holidays and a prosperous New Year!

Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Anchor Investment Management Ltd. to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their financial advisers prior to any investment decision.

Footnote: Bond returns based on the BofA Merrill Lynch US Corporate & Government Index; Moderate Portfolio consists of 60 percent US equity performance based on the S&P 500, 40 percent of bonds based on the BofA Merrill Lynch US Corporate & Government Index and 10 percent cash based on T-Bill returns from the FRED database to 1977 and from 1977 to present they are from the BofA Merrill Lynch US 3-Month Treasury Bill Index.