Retirement Blunders You’ll Likely Regret
Based on our experience working with tens of thousands of individual investors, we see people repeatedly making the same major financial blunders. And all too often, we see investment professionals making the same blundersalthough some of those blunders are made to line their pockets, not yours. That’s why we produced this guide, 13 Retirement Investment Blunders to Avoid. It was written specifically for those with investments of $500,000 or more.
A Lifetime of Savings at Risk
It probably took you a lifetime of saving and investing to accumulate your retirement nest egg and, at this stage of your life, you simply dont have time to recover from investment blunders. And no matter how much youve saved, it hurts to lose money. If this guide helps you avoid a handful of these common mistakes and blunders, you may save yourself a great deal of anguish, money and regret.
The 13 Blunders
Dont let these rather prosaic blunders lull you into thinking they are self-explanatory. Many people are surprised and enlightened by our explanations. We think youll find Fisher Investments approach unique and extremely useful.
Not Considering Tax Implications
This next common investing mistake revolves around taxes. When people have investment gains, they often want to take money off the table. While this can make sense if youre rebalancing your portfolio, make sure to consider the tax implications.
If youve held the asset for less than a year, youll pay ordinary income tax on any gains on the sale. If youve owned the asset for more than a year, youll pay long-term capital gains taxes, which are substantially lower.
Before selling any stock, consult your financial professional to understand the tax implications.
Avoiding this Common InvestingMistake: Use Tax-Advantaged Accounts
The easiest way to avoid tax consequences on trades is to use tax-advantaged accounts. I recommend maxing out your 401 and IRA before investing in any type of taxable account.
Youll receive tax benefits for doing so, and you wont need to worry about the tax consequences of selling shares.
Solution: Look For New Investing Opportunities
Although some investments might reverse course, and some require a longer-term view, holding onto a stock based on hope usually leads to more losses.
If you wait for a stock to rebound without exploring other options, youre losing out on whats called opportunity cost but its more like opportunity lost. Investors must consider what opportunities theyre missing while they stubbornly stay in a losing investment. An investing misstep like this can be avoided by doing a regular and objective portfolio review.
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Well Meaning Friends And Family May Not Have The Experience
Your immediate friends and family may have your best interests at heart, but often times they do not have experience in property investing.
Many of us grew up with the idea that you shouldnt own too many properties, or that having one to two investment properties is good enough.
But successful property investors know otherwise.
In fact, the pandemic had messed up the plans of many small property investors because of this simple math:
Imagine if you rely on one investment property for income. If your tenant loses their job and cant pay the rent, you now have to evict the tenant and deal with a 100% vacancy rate. Comparatively, if I have 13, 14 properties with over 50 rooms, even during COVID where I have 10 rooms empty, Im still at an 80% occupancy rate and can cover the running cost of my property portfolio comfortably.
The key is not in the number of properties, but in the ability to maintain positive cashflow, even at the worst of times. Having multiple properties just makes it easier.
Investment Mistake Tip #: Don’t Pick Stocks Asset Allocation Is More Important
Multiple research studies agree that at least 90% of the variance in a diversified portfolio’s returns are attributable to asset allocation.
What’s surprising, however, is that most people mistakenly focus 90% of their efforts on the remaining 10% of return by trying to pick individual securities. It makes no sense.
The ability to focus attention on important things is a defining characteristic of intelligence. Robert J. Shiller
Don’t make the mistake of spending all your time on the decisions that will make little difference in your overall performance.
Don’t try to pick the next hot stock or top performing fund when the experts who live and breathe this stuff are consistent failures at the task.
Instead, spend your limited time and resources determining your correct allocation to asset classes and strategies, and youâll be putting Pareto’s Law to work for you.
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Borrowing Against Your Home
It’s tempting for retirees who are house rich but cash poor to tap the equity that’s built up in a home. This is especially true if the mortgage is paid off and the property has appreciated substantially in value. But tempting as it might be, think hard before taking on more debt and monthly payments at precisely the time when you’ve stopped working and your income is fixed.
Rather than borrow against the value of your home, explore ways to lower your housing costs. Start with downsizing. Sell your current home, buy a smaller place in the same area, and put your profits toward living expenses. For the ultimate in downsizing, consider a tiny home for retirement seriously. Tiny homes are inexpensive, upkeep is easy, and utility bills are low. Living in an RV and traveling has its advantages, too. If you’re willing to relocate, sell and move to a cheaper city that’s well-suited for retirees. Or, stay put and find a roommate. The rental income will supplement your Social Security and savings.
Going Into Autopilot Mode
Another huge mistake many people make is not monitoring their investments after they retire. Even if you have steadily contributed to your retirement funds over the years, you cannot turn a blind eye to them. It is easy to switch to autopilot and assume that your portfolio will maintain current yields.
However, this mindset can be very dangerous once you no longer make regular contributions. The markets highs and lows have a greater impact when you are living on a fixed income. Furthermore, these losses can become even more problematic when you are regularly withdrawing from your accounts. This situation is exacerbated even further if you have not accounted for increased taxation and inflation rates. Evaluating and adjusting your strategy when needed is crucial to ensure that you dont outlive your retirement funds.
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Not Contributing Enough For Company Match
Many companies that have 401 plans offer to match a certain percentage of employees contributions. However, many people do not take full advantage of those offers. According to CNBC, only 72% of employees who have access to these types of plans took advantage of them, meaning that 28% did not.
Failing to take full advantage of your employers match may not seem like much of a loss in a given year, but when you consider the effects of compound gains whereby you earn interest on top of interest youve already accrued your losses really add up.
If you were to miss out on $1,336 in matching employer contributions, you would lose almost $43,000 over a 20-year period, assuming a modest 4.5% growth rate.
Always contribute enough to receive all the matching funds your employer is willing to pitch in, and dont assume because youre in an automatic enrollment plan that your contribution rate is set at the appropriate level to ensure you get the full company match. Companies often set the default contribution rate too low, and their workers miss out on matched money.
Pro tip: Periodically, make sure your employer-sponsored 401 has you on the right track financially. You can , and theyll check your asset allocation to make sure youre properly diversified. Plus, theyll check to see if youre paying too much in investment fees.
Being Late To Sign Up For Medicare
Medicare is critically important for tens of millions of retirees, and it will likely be critical for you, too. Just don’t be late enrolling in Medicare, or you’ll pay — a lot. Your Part B premiums can rise by 10% for each year that you were eligible for Medicare and didn’t enroll. Yikes!
So when, exactly, should you enroll? Well, you’re eligible for Medicare at age 65, and you can sign up anytime within the three months leading up to your 65th birthday, during the month of your birthday, or within the three months that follow. Those seven months are your initial enrollment period.
The thought of missing that period may be worrisome, but there’s a helpful loophole: If you’re among the many Americans who are already receiving Social Security benefits by the time they reach age 65, you should be enrolled in Medicare automatically. You might also avoid the late-enrollment penalty and be able to skip the deadline if you’re still working at age 65, or if you’re serving as a volunteer abroad.
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Mistake : Ignoring Share Price Falls
Another mistake I try to avoid when looking at passive income ideas for my portfolio is neglecting the threat of long-term share price decline. Lets say a share offers me a high yield, but meanwhile its share price declines markedly over the course of years. Am I just receiving with one hand what is being taken away with the other?
The answer to that depends on the exact circumstances. If I continue to hold the shares and the share price decline is just because a company has fallen out of favour with investors, it might not matter for me. I could still receive my passive income and the share price may have recovered by the time I come to sell the shares years down the line.
But it is a different situation if the share price decline reflects a worsening business. That could mean that I am unable to recoup my original investment if I decide to sell the shares in future. On top of that, the worsening business could mean dividends are cut at some stage. Even with an attractive initial yield, if the share price falls far enough, I may still lose money over time.
So when choosing passive income shares for my portfolio, I try to assess whether the share price looks overvalued. If it does, I would be wary of buying the shares no matter how high the yield might be.
Not Maxing Out A Company Match
If your company offers a 401, sign up and maximize the amount you contribute to take advantage of the entire employer match if available. The match is typically a percentage of your salary. For example, if you contribute 6% of your salary, your employer might match 3%.
If your company has a generous, matching program, it’s free money. The IRS has established a maximum for total contributions to an employee’s retirement plan from both the employee and employer. In 2021, the total contribution cannot exceed $58,000or $64,500 for those aged 50 and over with the $6,500 catch-up contribution. In 2022, the total contribution limit is $61,000 or $67,500, including catch-up contributions.
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Not Rebalancing Your Portfolio
Rebalance your portfolio quarterly or annually to maintain the asset mix you want as market conditions change or as you approach retirement. The closer you are to your last day of work, the more you will likely want to scale back your exposure to equities while increasing the percentage of bonds in your portfolio.
Letting Emotions Make Decisions
One of the biggest investing mistakes you can make is letting your emotions make decisions for you. Emotions related to investing typically take shape in two forms: selling when the market is down or buying when the market is up.
The former is the more common. People panic when they see their portfolio balance decline and then sell out of fear. Selling in a down market is the worst thing you can do. Chances are, if you sell, you might miss out on some of the markets best days.
Imagine you invested $10,000 in an S& P 500 index on January 3rd, 2000. If you stayed fully invested from then to December 31, 2019, you would have earned an annualized return of 6.06% . Now, imagine that you missed the best ten days in the stock market over this period. What would your return have been? 2.44%.
Let that sink in. If you missed the ten best days out of 7,302 days , your return would have been cut by more than half.
Whats more? Six of the best ten days occurred within two weeks of the ten worst days. The point is that not only can you not time the market, but you must remain fully-invested when the market drops, regardless of what your emotions tell you.
Avoiding this Common InvestingMistake: Buy, Buy, Buy
Do not sell when the market goes down. Instead, continue on a steady path of dollar-cost averaging, buying more shares when stocks get less expensive.
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Investment Mistake Tip #1: Don’t Focus Excessively On Expenses Or Taxes
The avoidance of taxes is the only intellectual pursuit that carries any reward. John Maynard Keynes
Don’t make the mistake of never selling an investment because you don’t want to pay taxes or fees. Conversely, you also shouldn’t ignore the tax consequences.
Taxes and fees are just one factor to consider when analyzing how a transaction will impact overall portfolio performance.
Other factors to consider, which may take priority over tax and expense concerns, include risk control, asset allocation, expected reward, and many others.
The objective of investing is to maximize profits for any level of risk, with taxes and fees being only one component to that equation.
Whether or not you should pay taxes and fees by making a transaction will depend on how the transaction is expected to impact investment performance net of fees and taxes.
For example, many people thought I was nuts to sell my entire investment real estate portfolio in 2006 and pay a horrendous tax bill on the gains. By 2009, those same people realized the taxes paid were nothing compared to the losses and headaches avoided.
Oversimplifying the decision by looking at just one factor can lead to expensive mistakes. Balance is the key.
Investing Mistake : Using The Wrong Information Sources
The quality of your information always depends on the source.In finance, misinformation abounds, as unscrupulous people profit by trying to boost the price of certain securities to benefit the sellers.
The many pyramid schemes that have tarnished the history of finance over the years are unfortunate but all-too-common examples.
Because finance is influenced by unknown variables that will take place in the future, it gives way to a cottage industry of financial letters and gurus, who wish to attract the attention of the investor by exploiting his fear and greed with the sole purpose of filling their pockets.
Moreover, even in the absence of malfeasance, there is very often an imbalance of information between the selling party and the buying party in a financial transaction.
Being among those who have incomplete or erroneous information is also a mistake that can have serious consequences. If you recognize yourself in that last sentence, dont worry! Having wrong or incomplete info is very common, since these errors are caused by human behavioral traits. Thankfully, theres an easy way to ensure that you have the best information at hand so you can make informed financial decisions.
An experienced, well-equipped and independent financial advisor can be an important ally to help you avoid these common pitfalls, minimize costly mistakes, and maximize your chances of financial success.
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Leaving A Job Before Vesting
Many employers require you to stay on the job for a certain amount of time before you qualify for your pension benefits or before the companys contributions to your 401 or profit-sharing funds actually become yours. Leave early, before youre vested, and you lose the money.
That may sound like a strong incentive to stick around, but a lot of people jump ship anyway. Its a mistake thats most common among millennials because they tend to prefer changing jobs more often than older workers.
According to CNBC, 39% of millennials who change jobs arent vested and forfeit an average of 23% of their retirement savings. Switch jobs before youre vested several times during your career and you could lose tens of thousands of dollars when you consider the growth potential of those funds.
If you consider leaving a job before youre vested, determine whether your new salary and your likely tenure on that job are worth any losses to your retirement account. You might be encouraged to stick around until you reach an anniversary or milestone. Otherwise, negotiate a salary or sign-on bonus that makes up for your losses.
Should You Work With A Financial Advisor
Do-it-yourself investing isnât for everybody. Although you save yourself the cost of a financial advisor, you take complete responsibility for your financial future. One mistake could mean the difference between retiring in comfort and living with the anxiety that you may outlive your money.
Did you know that a 2016 study by Vanguard Research found that working with a financial advisor can increase your income in retirement by 3%? The numbers speak for themselves, but they arenât even the most important reason to consider hiring an advisor. Investors who work with financial advisors report greater confidence, clarity, and peace of mind than do-it-yourselfers.
If youâre thinking about interviewing some prospective advisors, this new free tool will match you with highly-vetted local fiduciary investment advisors after a brief questionnaire.
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