One of the most complicated parts of retirement is handling your income and investments, particularly if you have stocks, bonds, certificates of deposit (CDs), and similar investments. Many retirees make investment mistakes that derail their plans and put them in financial danger. Learn about these common “sins” or mistakes to improve your chances of avoiding them.
Sin #1: Having Fuzzy Investment Goals
Marking and following set investment goals can help you gain a better understanding of where you’re at financially, compared to where you want or need to be once you retire. False confidence about your savings or investments can lead to huge oversights in your budget, and long-term repercussions.
The best way to meet your retirement goal is to use a system built for future wealth success. Setting investment goals will subconsciously increase the likelihood that you meet them, since you will shape your daily habits to conform to your plan. If you have a specific focus for where you want to be when you retire, you’ll be more motivated and thus more likely to succeed.
Sin #2: Missing Out on Tax Breaks
There are many different types of accounts used for investing in your retirement, and each one comes with its own tax rate. Many people choose a plan without even realizing the significant tax ramifications it could have, or they choose tax-deferred plans without knowing they’ll have to pay more in the future. Tax-favorable 401(k) and IRA plans enable tax-deferred incomes to compound over time, and give tax breaks each year you contribute.
It’s also unhelpful to focus too much on the tax consequences of your investments, which can distract you from keeping up with your set investment goals. If you base your investment decisions solely on avoiding taxes, you’re almost guaranteed to have a worse outcome than investing in an account with better options and a slightly higher tax.
Sin #3: Not Investing Enough
With 33% of Americans confessing to having no savings at all, and 56% having less than $10,000 saved, not investing enough in retirement is a very real mistake. A common cause for concern is that women are more likely than men are to invest less in retirement savings, due to inhibiting gender pay gaps and the increased likelihood of raising children instead of working.
The amount of money people have to invest in retirement seems to worsen over time: The economic crash of 2008 put a dent in the investments of Baby Boomers and Generation X retirees, and 72% of Millennials have less than $10,000 or no savings to invest at all. There are ways of catching up if you’ve fallen behind in retirement investments, such as sticking to a savings routine, contributing more to your retirement fund, and making savings your top priority.
Sin #4: Underestimating Fees
When you buy and sell investments, there is not one set fee to expect. Different brokerages charge their own fees, on top of commission-based financial planners you may be unaware are involved. If you’ve invested in something that charges high transaction fees, you could see a significant difference in what you could be making, versus what you are making.
Fees administered to accounts include mortality and expense risk (M&E) fees, annual contract fees, investment management fees, rider fees, and commissions. If you think using a broker is your best chance of upping your investment, think again. It’s often more beneficial to learn how to buy and sell investments, yourself, and save your money from being used on never-ending fees.
Sin #5: Pulling Your Investment Too Soon
With stocks, especially, it’s common for people to withdraw their investments as soon as the market goes down. But if you’ve invested in the stock market, the short-term should not even be a concern to you. There will always be fluctuations in the stock market, and if you have a lot invested, these fluctuations could affect you to a higher degree – but overall, the stock market has an upward trend.
Over the years, your stock market investment could see some drastic changes, for better or worse. Pulling out your stocks early can mean losing potential gains in the future, or leaving with less money than you originally put in. Leaving your investment longer than you might feel comfortable with will ultimately pay off, if you can withstand the bumpy ride.
Sin #6: Putting Your Eggs in One Basket
Too many people think it’s good enough to invest in only one stock or one piece of real estate. However, it’s exponentially more beneficial to spread your money across multiple assets – cash, stocks, bonds, property, and valuables such as antiques or cars. Investing in one thing is better than investing in nothing, but investing in multiple things is the best way to optimize your returns.
Investing in something like a mutual fund is a great way to diversify your holdings, and ensure you won’t lose everything if one of your investments goes south. Mutual funds are pools of money collected by more than one investor, called shareholders, which can be bought or sold at their current net asset value (hopefully for a profit).
Sin #7: Obeying the Media
Over the years, the media has accentuated and dramatized the ups and downs of the stock market, especially after blockbuster hits like The Wolf of Wall Street glorified the stock market and increased interest. People involved in the stock market would do well to ignore what the mainstream media says about the hottest investments on the market or which investments are due to come crashing down.
Trends change like the weather, but your long-term investment in the stock market is sure to see an eventual profit regardless of the short-term fluctuations the media highlights. Stay calm and take reserved, measured actions with your stocks instead of believing everything you hear on the news.
You may think you’re on the right track for investing in your retirement, but you could end up falling behind due to one of these common mistakes. Don’t let an avoidable oversight mean the difference between retiring in style and pinching pennies for the last years of your life.