By Darius Godlewski

Many people look forward to retirement and all the enjoyment it can bring after having worked so hard for decades. But from a distance, whether a few years or many years away from retirement, it’s not easy to clearly see what retirement will look like.

It’s a bit misty because, after all, there is a lot of uncertainty about the future, and how much money someone will need during retirement and have on hand is subject to numerous variables. But in the process of looking ahead, some people miscalculate, in part because they are not fully informed. Some of the things people assume to be true about money matters in retirement actually aren’t, and some financial points they think they grasp instead require a deeper dive. Misconceptions can develop, and those can be harmful to retirement and the enjoyment of it.

There are three key areas where myths and misconceptions can cost you in retirement:

Taxes.

One of the biggest misconceptions people have is that they will pay less in taxes in retirement. For one thing, they won’t have many deductions any more. If they were itemizing, a lot of those deductions go away. Most of the money Americans have is in tax-deferred accounts such as IRAs and 401(k)s, and they’re going to pay taxes on those distributions. Therefore, they need to strategize to lower their tax bill in future.

One strategy is doing partial Roth conversions on IRAs and 401(k)s. Roth IRAs offer tax-free growth on both the contributions and the earnings that accrue over the years, and the other big benefit in retirement is you won’t pay taxes when you take the money out. When current tax rates are relatively low, it’s a good window of opportunity to partially convert to a Roth.

Tax diversification also is important – having a portion in taxable accounts, another amount in tax-free accounts, and some in tax-deferred accounts.

Asset diversification.

Proper diversification across non-correlated asset classes is the key to protection from too much volatility in the markets. A non-correlated asset is an asset whose value isn’t tied to larger fluctuations in the traditional markets. Many people think they are very diversified because they have different stocks and mutual funds, but stocks and mutual funds are just one asset class. Non-correlated assets such as real estate, commodities, and municipal bonds can help you diversify.

Annuities.

They all sound similar but they all work differently. Some have high fees, some have low fees. Some are safe, some have risk. Annuities can get complicated, and it’s wise to have a fiduciary explain the differences

Annuities supplement other retirement income, such as Social Security and pensions. Fixed annuities make sense for people who don’t want much risk. An insurance company guarantees a specific payment by a certain date, and in the interim the insurer invests in safe vehicles such as highly-rated corporate bonds and U.S. Treasury securities. In a variable annuity, more risk is involved as investors aim for bigger profits. The insurer invests in a portfolio of mutual funds, which are chosen by the buyer.

Misconceptions about some financial elements of retirement can lead you down the wrong path and bring stress at a time you’re supposed to be relaxing. Gain the knowledge you need to bring clarity to your plan and the enjoyment you deserve.

Darius Godlewski is the president of Financial Wealth Alliance and a licensed investment adviser representative with Brookstone Capital Management.