If you’re like many people, you want to live comfortably in your latter years.
But, unfortunately, that’s not possible for all retirees.
Sometimes, the reasons are innocent enough: the entire market crashed right before retirement, unforeseen medical bills ransacked the retirement account, or a mischievous lawsuit caused irreparable damage.
While there are still some ways to reduce the likelihood of these unexpected financial catastrophes occurring, there are other instances where, through a moderate to high degree of negligence, one’s retirement plan is blown out of the water.
Careless mistakes cost a pretty penny. Some never recover financially. It’s heartbreaking.
Here are some ways to botch your retirement plan you should most certainly avoid.
1. Wait until tomorrow to invest until it’s too late.
People procrastinate saving for retirement for a variety of reasons. Sometimes, they’re living paycheck to paycheck. Other times, they are confused about their options. Occasionally, they don’t even realize they should be saving in the first place.
I imagine you’re not in that last camp. You probably know you should save, but something is holding you back from starting.
While there are some legitimate reasons to hold off on investing for retirement, it should be on everyone’s high priority to-do list.
“Good teachers and parents know that a key rule of thumb when managing a consequence or praising for accomplishment, is to engage a child sooner rather than later to help them link the result to their action. Unfortunately, as adults without a teacher’s guidance, we often do not manage our personal affairs in the timely way we should; we tend to push off doctors appointments, avoid obvious health matters”, explains Ronn Yaish, New Jersey Wealth Advisor at Yaish Financial Services. “When it comes to our personal financial health, some of us tend to shift into avoidance mode, even though most of us may know or understand the benefit and dramatic impact early planning can have on our financial situation.”
Yaish suggests, “Although it would be better to have a deep dive financial analysis done much earlier, once an individual passes the age of 50, they should consider putting themselves through the equivalent of a financial medical exam. This financial check offers an opportunity to do something about the current annual results and take action to improve their situation, bringing them closer to their goals, even with a later start. ”
If you’re not sure where to start, begin by taking a look at the Roth IRA. Roth IRAs are fantastic for those who think their taxable rate is going to be higher in their latter years than it is right now.
You see, Roth IRAs allow you to grow your retirement account without having to pay taxes on the interest or principal when you take the money out at retirement. Instead, you pay taxes on the money you put in for the year in which you invest the money. Pay now, don’t pay later.
Alternatively, you can opt to go with a Traditional IRA, but you’re going to pay taxes on the money you take out of the plan. So be careful to choose wisely.
Start your retirement account as soon as possible. You’ll be glad you did.
2. Put all your eggs in one basket and lose most of them.
When I asked some financial advisors to tell a story about the worst mistake they had ever seen their clients make, several of them pointed to clients who neglected to diversify their portfolio.
Humphrey G Thomas, a Brownsville TX financial advisor with HG Thomas Wealth Management says, “I always share to my client never to “marry” an investment, especially individual stocks. We always just want to long term be “dating” a stock. Once the relationship with particular stock is not beneficial anymore we should be moving on.”
Sometimes, people want to invest in their favorite tech or automotive company. Other times, they want to keep their money invested with a company they have worked at for decades. In either case, it’s best to sell any positions that are over-weighted and invest in mutual funds or ETFs that diversify the funds.
“Often times when clients feel they are behind where they should be, they want to take unreasonable risks with their portfolio. When you are approaching retirement is not the time to attempt a ‘Hail Mary’,” offers Benjamin Brandt, a North Dakota financial advisor and founder of RetirementStartsToday.com. “Many clients would be better served by simply working longer and pursuing a measured investing approach, rather than attempting to make up for lost time with extra-risky bets.
3. Don’t sit down with a financial planner.
Any destination worth reaching requires a plan to get there. The same is true of retirement.
Sometimes, what people think they should invest doesn’t always align with what they really should be investing.
By sitting down with a financial planner who cares and isn’t just going to sell you something they pull out of a hat, you can get a comprehensive retirement plan that has a high probability of meeting your needs.
There are really two questions good financial planners are trained to answer:
- “How much money do you need for retirement to meet your income needs?”
- “How much money do you need to invest in order to achieve your retirement account goal?”
By gathering your information and thinking carefully through your unique situation, financial planners can give you a realistic plan of action – follow it!
Should you invest $100 per month? $150? $300? Sit down with a financial planner so you don’t botch your retirement with guesswork.
Joe Carbone, a wealth advisor in New Jersey with Focus Planning Group shares similar experiences with his clients, “I have worked with so many clients who will spend thousands of dollars and countless amount of time managing their non-retirement account assets, but they often normally their biggest investment assets, their 401(k) plan. What I often see are awful allocation and contribution choices. I have worked with some clients who within 5 years from retirement and had over 95% in stocks. If they would have worked with a professional the potential for disaster could have been avoided.”
4. Raid your retirement account to buy stuff you don’t really need.
I once had a client who took a huge chunk of money out of his retirement account to buy a brand new truck. Please, don’t do that.
Remember, when money is in your retirement account, it’s money that’s making money. When your money makes money, that new money makes more money.
Therefore, when you take money out of your retirement account, you’re not just losing the money used to buy stuff you don’t really need, you’re losing all of the potential dollars you might have made had you kept the money where it belongs. And don’t even get me started on early withdrawal penalties . . . .
Keep your retirement account for retirement.
5. Get too conservative with their portfolio
If retirees get too scared and go too conservative too soon, it could ruin their dream retirement.
Clint Haynes, Founder and Financial Planner of NextGen Wealth sees this all to often.
“The biggest botch I typically see with clients is wanting to get too conservative with their investments the closer they get to retirement. When individuals are living 20-30+ years in retirement, you need your plan and investments to last. If you go 100% bonds or CD’s, yes it will certainly make you feel safe, but when you take into account the “silent killer” that is inflation, your buying power on that retirement portfolio might only be half of what it was in as little as 15 years.
And, when you take into account the rate of medical inflation these days, it could be even worse. With that said, it’s extremely important to still have exposure to equities while in retirement.
My typical recommendation is at least 40% and even more in many situations. Equities may come with a little more apparent risk, but fixed income investments, while they feel safe, come with a silent risk that’s eating up your purchasing power faster than you know it”
Make smart choices when it comes to your retirement plan. It’s not rocket science. You just need to do your homework and behave. You can do it.