Retirement is a time to enjoy the results of your hard work, but too many retirees are nervous about their money and whether it’s going to last as long as they do. Through diligent planning and strategy, you can enjoy this phase of your life smoothly, but you have to be aware of a source of financial stress and mistakes you may not be aware of: Yourself.
Many retirees make investment mistakes that jeopardize their financial stability. Recognizing these mistakes and understanding how to prevent them at the right time is essential for maintaining a reliable income stream and safeguarding your wealth. This article examines the six most common investment mistakes I see retirees make and offers practical advice to help you approach this phase with confidence.
1. Being Too Conservative with Bonds and Cash
The conventional wisdom in the investment world is that as you approach retirement, you need to significantly increase your bond holdings so that you can make your overall portfolio more conservative. One very popular (and very foolish) rule of thumb is you should have your age in bonds, with the rest allocated to stocks. You start with the number 100, subtract your age – let’s say 65 – and the remaining 35 is what you’ll have in stocks, while your age, 65, will represent your percentage of bonds.
While reducing volatility is a legitimate concern, and something you should aim to do, especially for things like sequence of return risk, being overly conservative can hinder adequate investment growth. Over time, inflation erodes the purchasing power of cash, and while bonds are stable, they might not provide returns sufficient to exceed inflation plus your own distributions over a long period of time. And unless you have tons of money, you need a solid portion of your money to earn high enough returns so that you can comfortably distribute from your portfolio over the long term. Stocks have historically done that (no guarantee it will continue, of course).
A well-rounded portfolio that incorporates a variety of growth-focused investments, such as stocks, alongside bonds and cash, is vital. Cash can be used as an emergency fund, bonds can help lessen the volatility of your portfolio, especially during bad economic times, while stocks can provide the long term growth you need so that you have enough money in your 80s and 90s.
2. Overconcentration in the S&P 500
The S&P 500 is an widely popular index among investors, as it contains a position in the 500 largest companies in the US. However, over-relying on it can result in a lack of diversification. Concentrating your portfolio exclusively on large-cap U.S. companies exposes you to substantial risk if this market segment (large cap stocks in the US) performs poorly.
Diversification is essential for minimizing risk and improving returns over the long term. Including a range of asset classes and geographic regions can shield your portfolio from localized economic downturns. For example, small and mid-cap stocks often demonstrate growth potential than large-cap stocks do not, while international equities provide opportunities in growing emerging markets. A globally diversified portfolio that aligns with your financial goals can assist you in managing market volatility more effectively.
3. Concentrating Assets in Tax-Deferred Accounts
Many retirees prioritize savings in tax-deferred accounts, like traditional IRAs and 401(k)s, throughout their careers. While these accounts provide immediate tax benefits, relying exclusively on them during retirement can lead to complications. Withdrawals from these accounts are taxed as ordinary income, and required minimum distributions (RMDs) can elevate your tax bracket.
A well-balanced tax strategy is vital for effective retirement planning. Integrating tax-deferred accounts with taxable brokerage accounts (like a joint or individual account) and tax-free options, such as Roth IRAs and HSAs, enhances flexibility. By having money in each account types, you can manage your taxable income more efficiently by selectively choosing when and where to distribute your income from. In some years of your retirement it may be wise to incur income and take money from your tax-deferred assets, while in other years it may be wise to not incur additional income and take money from your tax-free assets. The point is I want you to have a choice on where to take money from, and if you have all your money in one place (like tax-deferred accounts), then you simply don’t have that choice. Doing this over many years, and even decades, has the potential to help you reduce your lifetime tax burden.
Even if you are behind the 8-ball on this topic, the good news is that diversifying your tax strategy is something that you can do in the later years of your career, or even during retirement. Just make sure you have a well thought out plan to achieve this goal (and seriously, if you aren’t confident in what you’re doing, please reach out to a financial planner).
4. Withdrawing Insufficient Funds
Retirees often dread withdrawing from their portfolio, and some of them never want to touch their principal, thinking they must rely solely on interest and dividends for their income. While it is important to safeguard your savings, withdrawing too little can restrict your lifestyle and leave you with excess amounts of money when you have little need for them (ie, when you’re in your 80s and the idea of going out to your favorite restaurant sounds like a big trip – nevermind going overseas or across the country).
Effective withdrawal planning is crucial. The 4% rule serves as a standard guideline, indicating that retirees can withdraw 4% of their portfolio each year to ensure a high degree of confidence that that money will last over a 30 year period. However, this approach is not universally applicable and I obviously can’t recommend it to you without knowing the particulars of your situation. I do feel comfortable in saying that it’s a good starting point.
You should also consider factors such as life expectancy, healthcare costs, and market performance. If your portfolio performs well, you might withdraw slightly more; conversely, if it underperforms, you may need to reduce your withdrawals slightly. These distributions don’t need to be in a straight line, as life isn’t that predictable. I do want to have a thoughtful distribution strategy, that allows you to fully enjoy your retirement, and your money, while ensuring that your savings will serve you well for decades to come.
5. Overemphasizing News
Financial news frequently dramatizes short-term market changes, causing stress for retirees who are naturally curious about how their portfolios are faring. Yet paying too much attention to the news of the day can be quite harmful. Concentrating on headlines regarding interest rate variations, legislative developments, or presidential actions may lead to hasty investment decisions that undercut long-term investment goals.
Instead, concentrate on what is genuinely important: a robust investment strategy. Emphasize asset allocation, diversification, and low-cost index funds rather than reacting to temporary news reports. Think about how you can utilize tax diversification and asset location to your benefit. These core principles considerably influence your portfolio’s success much more than daily market news.
Keep in mind that market fluctuations are normal, and a properly diversified portfolio is built to endure them over time.
6. Handling Numerous Investment Accounts
I often meet with retirees who have several, sometimes over 10, investment accounts all across the financial universe. Three Traditional IRAs, four 401(k)s, a joint account, an individual account, and a couple of Roth IRAs to boot. As a financial professional, even I find this hard to keep track of! I can’t imagine that many people are able to adequately keep up with all those accounts, in addition to their full time job doing something unrelated to their investment accounts. It also makes it significantly harder to know your asset allocation, your fees, your investment performance, and required minimum distributions.
Consolidating accounts simplifies the management of your portfolio, can lower fees and will simply make your investment life much easier. Transferring old 401(k)s into a single IRA, for instance, streamlines your investments and facilitates tracking your progress toward financial objectives. Furthermore, having fewer accounts can help prevent missed RMDs, which can result in significant penalties. Before consolidating, confirm that you won’t forfeit valuable benefits, like creditor protection, in the process. Simplifying your accounts can enhance clarity and efficiency in your retirement planning, ensuring that your financial strategy aligns with your lifestyle.
Conclusion
Steering clear of common investment pitfalls is essential for a secure and fulfilling retirement. As the old saying goes, an ounce of prevention is worth a pound of cure.
By achieving the right equilibrium between growth and safety, diversifying your portfolio and tax approaches, and maintaining a straightforward and simplified strategy, you can maximize your financial potential. Resist the urge to respond to short-term news and concentrate on long-term planning tailored to your specific needs. With prudent management and informed choices, your retirement years can be free from financial worry, allowing you to focus on what truly matters: spending quality time with your family and engaging in the activities that bring you joy.