You’ve heard the stories. Hard-working people on the road to achieving their retirement dreams become sidetracked by unforeseen developments: unexpected medical expenses, a downturn in the stock market, a job loss – the list goes on.
You may have experienced setbacks in your own retirement plans. Maybe you haven’t contributed as much to your retirement savings as you’d originally planned. Maybe you’ve been too aggressive with your investments in an attempt to improve your portfolio’s performance and reach your goals sooner. Everything changes.
To learn from the past, we must first look at the common big mistakes to avoid.
Inflation can eat away at your savings and threaten your ability to maintain your preferred lifestyle during retirement. During the next 20 to 30 years, your cost of living will likely double — or even triple.
For example, a retirement fund of $1 million generating 7% interest will generate a $70,000 income today. But in 20 years, at a conservative 4% inflation rate, you’d need more than double that income — $153,379 — to maintain the same standard of living. Will your investment income keep up with the cost of living?
We encourage you to work closely with your financial advisor to help you evaluate your ability to meet future needs, considering your current expenses, inflation, taxes, and annual savings.
Asset allocation is the combination of asset classes (such as stocks, bonds, and cash alternatives) in your portfolio and their proportions to one another. Proper asset allocation can help you take advantage of return potential while balancing risk.
Many investors’ retirement assets are not properly allocated based on their risk tolerance and stage in life. By not having an appropriate asset allocation, these individuals could be exposing their portfolios to unnecessary risk or investing too conservatively to achieve their goals. Either way, they will likely fall short of reaching their retirement dreams.
For example, if you are in your early 30s and, therefore, have many years until retirement, an asset allocation that is too conservative (e.g., investing only in bonds) may hurt your ability to accumulate enough for the future, especially after taking the effects of taxes and inflation into account.
On the other hand, if you are a retiree in your late 60s, investing too aggressively (e.g., investing only in growth stocks) could keep you from meeting your income needs and expose your portfolio to more risk than necessary.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. Asset allocation does not guarantee against loss; it is a method used to help manage investment risk.
Like inflation, taxes can erode your investment savings. Many people do not take full advantage of tax-deferred investment vehicles when saving for retirement. If you put money into a tax-deferred investment — such as an IRA, 401(k) or another qualified retirement plan — it can accumulate free from tax until you withdraw it at retirement. That means you may have more money to generate retirement income for a longer time period. Any withdrawal before the age of 591⁄2, however, may be subject to a 10% IRS penalty and will be fully taxable.
Lower tax rates on capital gains and dividends may result in more favorable returns on taxable investments, thereby reducing the difference in performance between accounts. You should consider your personal investment horizon and income tax brackets, both current and anticipated, when making an investment decision, because these may further affect the comparison’s results.
You may think you’ll spend less in retirement than you do now. But are you taking into account the possibility that you’ll want to take more vacations, make home improvements, and dine out more frequently?
Are you considering the likelihood that you’ll face unexpected healthcare, long-term care, and other expenses?
Will you have enough money to fund your retirement lifestyle?
Work with your financial advisor to help you estimate how much money you will need during retirement and come up with strategies that could help you supplement your income.
Some investors believe that when the market is down they should sit on the sidelines until it rallies. If the market is up, they wait for a correction to buy at bargain rates. These tactics seldom work. When building assets for retirement, you need to stay focused on your long-term goals. Prudent investors stay in the market.
Missing just a few of the market’s best days during any period can result in significantly reduced returns. It’s not market timing, but time in the market, that can bring about long-term success.
It’s important to base your long-term investment strategy around realistic return expectations. Keep in mind, there will be “up” and “down” years. Successful investors, however, develop the discipline and patience to shrug off market fluctuations.
Because of better nutrition, quality medical care, and a growing health consciousness, life expectancy continues to increase in the United States. Many Americans now live until they are 90 or 95 years old.
In fact, the time you spend in retirement may equal or even exceed your working years. That means you may live 20 to 30 years without receiving a paycheck. Will your assets last until you are in your 90s, or will you outlive your nest egg?
Your financial advisor can help you determine how long your retirement savings may last and help you develop a plan to make sure you continue to receive an income stream throughout retirement.
Some investors start taking withdrawals from their IRAs or retirement plans as soon as they reach age 59 1⁄2. In fact, some people take withdrawals even earlier. However, this may not be the best approach. Remember — you could live 20 or 30 years in retirement, and taking withdrawals earlier than necessary may cause your nest egg to deplete faster.
Distributions are required to be taken from traditional IRAs and annuities once you reach age 70 1⁄2. No mandatory distributions are required from Roth IRAs at any age. Consider withdrawing funds from taxable investments first. This will give your tax-deferred vehicles more time to work for you.
One of the greatest risks to your retirement nest egg is long-term care expenses. According to one survey, at least seven out of 10 Americans over age 65 will need long-term care services at some point. Today the median annual cost of a private room in a nursing home is more than $90,000.
If you require nursing-home care in 20 years, it could potentially cost you almost $200,000 each year, assuming a 4% annual increase in costs. Keep in mind, government assistance for these expenses is very limited, and few people qualify for it.
Without proper planning, you could see long-term care expenses wipe out your life savings, leaving you no money to live on and nothing to leave behind for your loved ones. Work with your financial advisor to learn about insurance strategies that could help you safeguard your retirement assets and preserve wealth for your heirs.