Retirement is defined as the withdrawal of one’s position or occupation or from one’s active working life. The mere mention of the word conjures up varying emotions and thoughts – everything from excitement and jubilation to fear, panic, anxiety and stress. According to a newly released report from Gallup, 46% of U.S non-retirees believe they will not have enough money in retirement (see below). For those already retired, the attitude is much more positive though with 78% reporting that they have enough money to live comfortably. Retirement for some is simply providing a comfortable existence for themselves and their spouse while for others, traveling, entertaining and leaving a financial legacy for children are all important factors contributing to an individuals’ future planning. Wherever you fall within the range of comfortable living to living life to the fullest, there are a few pitfalls and mistakes to avoid to maximize your retirement account.
Trying to time the market
Trying to time the market just doesn’t work. With over 30 years in the financial services industry, I have repeatedly witnessed clients trying to time the market and the outcome is rarely ever favorable. The average person who tries to go in and out of the market ends up selling when it’s low and buying when the market is high. Impulsive decisions are part of human nature and often, greed and fear drive financial decisions.
Borrowing from retirement funds
Another retirement investment mistake to avoid is to not take a loan against your 401(k). Even if sanctioned by your company, which is often a provision companies use to attract employees, it is never a good idea to borrow funds from your retirement accounts. Use other ways or find different means to pay for the things you were going to borrow against.
Switching 401(k) funds
Similarly to timing the market, attempting to switch funds doesn’t produce the positive outcomes one would hope. Individuals who do this usually analyze how the funds performed during the year and then end up buying those funds. However, it’s inevitable that those funds could be involved in a downturn, so you end up buying last year’s performance. It is important to remember that past performance does not guarantee future performance. What seems like a wise decision on paper ends up costing you. Set up an allocation as part of your retirement plan and stay the course.
Warren Buffet said, “the stock market is where impatient people transfer money to patient people.” Wise words and very truthful. Patience is one of the biggest assets contributing to positive investment strategies. Focusing on short-term results can be detrimental to the long-term goals of your portfolio. Remain patient!
No real plan
One of the single most important pieces of advice that any financial advisor or business professional should give a client is to develop a well thought out retirement plan. One that considers factors like future lifestyle choices, income components which include savings, social security, retirement accounts and any debt you may incur, long-term health care costs, inflation and caring for those left behind. Plans can be modified but they provide the framework for future decision making. Therefore, actions are decided based on solid fact-finding analysis rather than based on emotion and fear.
Certainly, retirement means different things to different people as does retirement planning. Some have well thought out retirement plans which cover every component and every life situation while others’ plans are very short and just cover the basics. Regardless of the type of retirement plan, it is important to avoid the mistakes mentioned above. Retirement planning is not an exact science but making smart decisions and not being emotionally reactive are essential considerations in building a financially secure retirement portfolio.