Nine Mistakes in Retirement Planning Revisited

0
29

By Nadav Baum

A few years ago, I wrote an article titled “Nine Mistakes in Retirement Planning,” which discussed some common strategic errors that some people may make that leave them short of their financial goals for retirement.

Fast forward to today: has anything changed?  Not really—lots of people are still making these same mistakes.

Retirement is supposed to be the time of life when people finally have the opportunity to pursue all the interests they may not have had time for during their working years.  Yet many people are putting their comfortable retirement at risk every day by the financial decisions they make, and just don’t realize it.

Here are nine common retirement planning mistakes people make, each of which can lead to potential obstacles in retirement:

#1:  Not maxing out your 401(k)

Saving in a company’s 401(k) plan is often one of your best savings opportunities because it grows tax-free until you take the money out after you retire.

#2:  Not diversifying asset classes

Consideration should be given to balancing your portfolio between stocks, bonds and cash.  In addition, diversifying within the asset classes into small vs. large cap stocks, or growth vs. value, may help to create an efficient portfolio.

#3:  Putting all your money in your company’s stock

No matter how good your company is, various outside factors like a changing economic landscape or increasing competition can drive its stock price down.

#4:  Managing your own investments

Individuals who handle their own investments often let emotions cloud their judgment.  An experienced advisor takes the emotion out of investment decision-making.

#5:  Not sticking to your plan

An investment plan should define your risk tolerance and the appropriate investment vehicles.  The best plans are created — and followed — in partnership with a financial advisor.

#6:  Underestimating how long you will be working

Recent economic conditions point to a work force that is putting off what they thought was going to be their retirement date.  Make a realistic assessment of when you are going to retire; this affects your current asset allocation strategy.

#7:  Not keeping enough cash

A cash position can help alleviate a lot of stress concerning your income; and may help prevent you from being forced to sell good investments in bad markets.

#8:  Underestimating how long your retirement will last

Longer life-spans stretch retirement accounts.  Over time, inflation and taxes will erode a retirement account’s buying power.  Too often retirees become too conservative and don’t invest enough in equities.

#9:  Not knowing distribution rules for IRAs

Non-qualified IRA distributions, before the year you turn 59½, incur a 10% penalty.  You will not incur this tax, however, if you create a distribution plan to take “substantially similar” payments over the longer period of 5 years, or until you reach age 59½.

Making any of these mistakes may damage a lifetime’s worth of retirement planning.  When your money has to last the rest of your life, avoiding unnecessary risk may be as important as choosing how to invest it in the first place.

Nadav Baum, Executive Vice President, BPU Investment Management, Inc., can be reached at nbaum@bpuinvestments.com.

The Information contained herein is not intended to provide any specific investment or tax advice.  A qualified tax professional should be consulted prior to finalizing any planning decisions.  The information presented is intended solely to bring into perspective for consideration the availability of certain planning strategies that might be beneficial.  An appropriate recommendation can only be made after proper consultation to determine if any of the strategies are right for you.