5 Ways You’re Sabotaging Your Retirement
There’s a lot of information out there these days on retirement income planning. Everybody is offering advice, and a lot of it is really good.
Yet it seems that no matter how much information is out there, people are still hitting retirement with little or no preparedness at all. Here are five of the most common ways people are sabotaging their retirement.
1. Jumping in Without a Plan
It’s one thing not to have a financial plan when you’re 25. At that point your financial plan is to simply save as much as you can. It’s completely different when you’re 55.
The closer you are to retirement, the more you need a financial plan. Without one, you can’t know if you’re on track. And if you don’t know where you stand, you’re just throwing money at your investment account. That’s not the worst thing you can do (it’s better than not throwing money at it, which we’ll touch on next), but you can do better.
Your financial plan doesn’t need to be a massive 200-page document. It just needs to identify where you are today, where you want to be, and how you will bridge the gap. The more specific you get the better, but even a basic idea will put you ahead of almost everyone.
2. Saving “Something”
One of the most dangerous retirement savings plans is to just save “something.” I think people do this because saving nothing makes them nervous (rightfully so), so they put away some arbitrary amount to calm their nerves.
The problem is they don’t know how much money they’ll actually need in retirement, and now that they’re saving something, they’re even less motivated to figure the actual number out. As you might guess, this doesn’t lead to a great retirement.
A common rule of thumb for retirement savings is to put away 10-15% of your pre-tax income. But, again, you can’t know how much you really need to save unless you have a financial plan in place.
3. Risking Too Much – Or Too Little
Everyone is comfortable with different amounts of risk. Some people sleep just fine with an aggressive portfolio. Others are nervous wrecks if there’s any possibility that their portfolio could lose value. You need to find the right level of risk for you. If you have too much risk, you’ll almost assuredly panic and sell just when you shouldn’t – and lock in all of your losses. We’ve all heard stories of people who sold at the bottom in March 2008. You don’t want to do that.
On the other hand, you don’t want to be too conservative either. If you’re overly conservative, you’ll never be content with your returns, and you’ll be constantly tempted by whatever shiny thing the financial media is talking about this week.
You want to find your Goldilocks portfolio. This will help you ride out the bumps in the road (even the really big ones), and harvest the long-term returns you deserve.
4. Being Too Generous with Uncle Sam
Taxes are a fact of life. You have to pay them, but you don’t have to pay more than is required. Most investors not only ignore ways to minimize their taxes (like asset location and tax loss harvesting), but they also increase their taxes by trading too much. As a general rule (with exceptions, of course), the more you trade, or the more the mutual funds you invest in trade, the bigger your tax bill will be.
You should also be paying attention to how to minimize your taxes outside of your investment accounts. Is your income going to spike next year? Maybe you should hold off your end of year charitable donations until the beginning of January so your tax deduction will have a bigger impact.
5. Getting Investing Advice from the Wrong Places
It’s not that the financial media is out to get you. They’re not – well, not intentionally anyway. It’s just that they’re not in the business of retirement income planning.
They’re in the business of selling ads.
To do that, they need your attention. Luckily for them, it’s pretty easy to get investors’ attention. All they need to do is either yell about how this is the best time ever to invest, or how the world is about to fall apart.
The world has been on the verge of disaster a lot lately. By my count, since last summer, the markets have supposedly been about to collapse five times:
- July 2015 – The Greek Debt referendum and Chinese market volatility
- August 2015 – Black Monday
- January 2016 – Turmoil in the Chinese markets and an abysmal start of the year
- June 2016 – Brexit
- November 2016 – Donald Trump winning the election
That’s nearly one market-shattering event per quarter for the past eighteen months. And yet, the markets keep chugging along.
The financial media knows that people are nervous, and they use that to their advantage. But here’s the thing – you don’t need to pay attention to them. The world is a volatile place, so if you’re constantly on the lookout for danger, you can always find it. But, if history is anything to go by, you’ll have a much better investment experience by stepping back, turning off CNBC, and harvesting the long-term market returns.
When it comes to planning for retirement, you can either be your worst enemy, or your best friend. If you can avoid these five mistakes, you have a good chance of being ahead of the game.