We picture retirement as a time for relaxation, travel, and hobbies. Without a great deal of planning, however, this idyllic picture can quickly go south. While numerous factors play a role in ensuring a secure retirement, investing is paramount. After all, there are many common investing mistakes that even well-intentioned investors can make, which can ruin their golden years.
In this article, we will examine seventeen key retirement investing mistakes and the strategies for avoiding them.
1. Not Planning for the Future
A financially secure retirement won’t just happen on its own. You have to craft a carefully considered plan and then stick to it. Even so, nearly half of American households do not have any retirement savings, according to the Survey of Consumer Finances (SCF).- What is the maximum amount I can save each year?
- Have I taken advantage of every saving opportunity, such as my workplace retirement plan and IRA?
- To grow my assets, where am I investing them?
- Is there anything I can do to save more?
- What is the best way to manage my assets?
2. Dragging Your Feet
Often, we are our own worst enemy when it comes to putting together a successful retirement plan. You are better off starting your investment journey sooner rather than later, especially if compound interest is involved. Even modest contributions can grow exponentially over time due to this powerful phenomenon. Taking advantage of this growth as early as possible allows you to maximize its benefits.Invest now, even if you can only afford a small amount, to remedy this problem. Even a few years of delay can significantly reduce your nest egg. Contribute whatever you can comfortably afford, even if it’s just a small amount.
3. Leaving Your Job
It is estimated that the average worker will change jobs 12 times during their career. By doing so, they leave money on the table through employer contributions to their 401(k) plan, profit-sharing programs, or stock options.Why is this a problem? The problem has to do with vesting, where you don’t own the funds or stock that your employer matches until you’ve worked for a set number of years—usually five years.
4. Having Too Much Debt
The total amount of debt carried by American households at the end of 2023 was $17.503 trillion, averaging $104,215 per household.The problem is that if you are in retirement with high credit card balances, the payments might affect your budget. As a result, you might have to pay high interest rates and have less money to spend on activities and entertainment.
5. Not Maximizing Tax Breaks
You might be surprised to learn that the government offers retirement savers a variety of incentives to save for retirement. A 401(k), an IRA, and a 403(b) plan are examples of tax-deferred accounts that let you accumulate wealth tax-deferred or even tax-free. This way, you can compound your money even faster by avoiding taxes today.Plus, you may even qualify for a tax break today if you contribute to your account, similar to a traditional 401(k) or IRA.
6. Underestimating the Importance of Time Horizons
To develop an effective investment strategy, consider your time horizon, i.e., when you plan to retire. With a longer time horizon, younger investors can take a more aggressive approach to investing.Investing in higher-risk assets can increase returns, even if some risk is involved. In contrast, as you approach retirement, you should decrease your risk tolerance and reduce your time horizon.
7. Underutilizing a Company Match
Many employers offer 401(k)s, so take advantage of the employer match by signing up and contributing as much as you can. Matches are typically based on a percentage of your salary. For example, you might receive 3 percent from your employer when you contribute 6 percent of your salary.8. Not Considering Housing Options
If you aren’t sure where you will live in retirement, now is a good time to start researching. Living expenses can vary greatly depending on where you live, so you’ll have to account for them if you choose to spend winters somewhere else.9. Pursuing ‘get Rich Quick’ Schemes
Investing is not a sprint; it’s a marathon. As such, it’s a recipe for disaster to chase unrealistic returns through get-rich-quick schemes. These schemes often promise astronomical returns but end in significant losses due to their high risk and unregulated nature.To avoid this, stick with tried-and-tested investment strategies. For instance, invest with a long-term perspective and build a diversified portfolio. If you are unsure about a specific investment option, seek professional advice.
10. Putting All Your Eggs in One Basket
No matter how well-intentioned, putting all your eggs in one basket is a risky move.You mitigate risk by distributing your investments across different asset classes, such as stocks, bonds, and real estate. As a result, a downturn in one asset class could be offset by growth or stability in another.
Again, diversifying your portfolio is important. Considering your risk tolerance and time horizon, consider diversifying your portfolio based on stocks, bonds, and other asset classes.
11. Ignoring the Costs of Health Care
A retired couple aged 65 in 2023 will need approximately $315,000 in savings (after tax) to cover health care expenses in retirement, according to the Fidelity Retiree Health Care Cost Estimate. However, you can lower that figure by staying healthy.12. Distribution Strategies That Fail
Retirement savings don’t just turn into income when you sell investments and pocket the cash. To support yourself in retirement, your assets should be used to account for your income needs and your timing, taxes, life expectancy, and the types of accounts you have. In particular, it’s how withdrawals from different types of accounts or stocks are taxed.For example, once you reach age 73, be incredibly attentive to taxes and timing. The IRS requires your 401(k)s, SEPs, SIMPLEs, and traditional Individual Retirement Accounts (IRAs) to make required minimum distributions (RMDs).
The reason? You could owe taxes on long-term capital gains and qualified dividends in your nonretirement accounts if RMDs increase your taxable income.
An effective retirement income plan and tax-efficient distribution strategy can help. For example, some retirees might opt to take withdrawals before age 73 from tax-deferred accounts like traditional IRAs when they are more flexible about how and when to reduce retirement account balances and future tax on RMDs.
13. Ignoring Fees
The fees associated with your investments can significantly impact your long-term returns despite appearing small.That said, it is important to remember that a number of expenses, including management fees, expense ratios, and transaction costs, can erode the growth of your investments. Also, when choosing an investment option, you should take the fees into account and choose one that’s low-cost.
14. Letting Your Portfolio Drift
Due to market fluctuations or individual asset class performance, the allocation of your investment portfolio can diverge from your original target over time. When you rebalance your portfolio, return it to the original asset allocation you intended. As a result, your risk profile remains aligned with your goals.- Calendar-based rebalancing. In this case, the portfolio will be regularly reset to the target asset allocation. Frequent rebalancing results in a higher transaction cost, as cash flows are absent to assist in rebalancing.
- Threshold-based rebalancing. The portfolio’s deviation from the target allocation is triggered in this case. One major disadvantage of threshold-based rebalancing is that it requires daily monitoring, which makes it impractical for investors who manage their own portfolios. Transaction costs are higher when the threshold is smaller because the tracking error is lower.
- Calendar—and threshold-based rebalancing. A rebalancing approach that combines both approaches. Whenever the portfolio has departed from the target allocation by more than a specific percentage, it is rebalanced based on a calendar frequency.
