Retirement mistakes for investing are among the most serious in personal finance. That is because they can make the difference between a comfortable lifestyle when you retire and joining the aging poor. Your generation faces what previous ones had not. That is the Longevity Risk. Given longer life spans, the odds are greater that you could run out of money. Fortunately, being aware of the most common mistakes can help you build enough wealth to fund your retirement and prevent those worst-case scenarios.
At the top of the list of retirement mistakes you could make is not planning. Like death, aging can be a taboo topic. Yet, without an overall plan for how to create and protect wealth, you will not do it.
Of course, the planning can be disrupted by emergencies such as loss of a job or medical bills not covered by insurance. However, if you are committed to your plan that “derailment” will only be temporary. Remember, you are in control.
A plan positions you to always be open to investment opportunities. For instance, you will choose to participate in the tax-advantaged 401(k) employer-sponsored accounts. Usually employers contribute to them. Yet, only 20 percent of the workforce signs up for the 401(k), found the Center for Retirement Research at Boston College.
However, contributing to the 401(k) is only the first step. The next is that you have to continually manage what is in the 401(k). A typical mistake is not diversifying according to the level of risk you can tolerate emotionally and which is age-appropriate. For example, you may be putting too much in company stock. A more prudent approach is to only put a small percentage in any one equity, including the stock of the company. Mutual funds and Exchange Traded Funds (ETF) spread the risk. With those, though, you have to monitor the fees. Excessive fees can reduce your earnings.
In terms of aligning risk with your age, one guideline for equities is to subtract your age from 110. What is left represents the percentage of equities in the portfolio. Being too risk-averse could prevent investment yields from keeping up with inflation. Although stocks are among the riskiest investments they can have among the highest yields.
Also, your portfolio should be balanced through what is known as “asset allocation.” That would include a percentage in bonds and other investment vehicles. However, only invest in what you understand. That is the Oracle of Omaha Warren Buffett’s first rule of investing: Stick with what you know.
Along those same lines of tax-advantaged opportunities is the individual retirement account (IRA). Financial services organization TIAA-CREF found that a whopping 80 percent of those surveyed did not have an IRA. As with the 401(k), you must continually evaluate your investments in the IRA.
Not maximizing wealth and/or losing money also can result from ignoring “unsexy” investment vehicles such as Certificates of Deposit (CD), I-bonds and individual Treasury Inflation-Protected Securities. During periods of high volatility in the stock market, they could provide a safe harbor. However, it could be a mistake to leave the funds there long term. You must continually manage investments.
The good news is that if you plan and are alert to changes in the risk/reward ratio for diverse kinds of investments, you can prevent many of the common retirement mistakes. In addition, you will have the confidence to do course correction on those parts of your investment plan which are underperforming.