Just like most events, the earlier you start prepping for retirement the smoother the transition should be. They say that knowing is half the battle; but if you’re planning your own retirement, how are you supposed to know what to do? Here are 10 of the most common mistakes we see when others plan for their own retirement—and why they’re so detrimental to your financial health.
- Not having a Financial Plan (or only looking at it once).
A financial plan can be the most important part of your retirement preparation. When you complete a financial plan, you’re articulating what really matters to you. There is often a great amount of uncertainty in your retirement process before completing a financial plan. Some people can discover that they’ve done the necessary steps to set themselves up nicely for retirement, whereas others may think they’ve got all their bases covered when the reality of the situation paints an entirely different picture. A strong financial plan is a dynamic document that changes as your goals, life and finances change. When making a significant financial decision, like gifting assets to your family, coming back to your financial plan can help you determine the effect that gift would have on the rest of your plan.
- Underestimating your Lifespan.
It may be hard to believe that you could be in retirement for thirty years, but that’s certainly the case for many retirees. According to a survey conducted by USA Today in 2014, 46% of investors were worried that they will outlive their savings. By being aware of your own longevity, it can help you determine what measures you need to take before reaching retirement. Typically, we build out all of our financial plans to age 95 so that we can see the cost of financing a long life (and long retirement).
- Not maximizing any employer matched contribution to your retirement account.
This is one of the biggest mistakes that employees can make. By not maximizing your contributions to qualify for an employer match, you’re turning away free money. On top of that, these are tax free dollars—an enormous advantage on which you should really aim to capitalize. If you aren’t familiar with your company’s policy, contact your human resources department as soon as possible and see what’s involved in getting started.
- Not Factoring in the cost for Long Term Healthcare
Just like it’s imperative that you have enough short-term savings to last you 3-6 months, when you plan for retirement you need to have enough saved to fund emergency situations. Without properly taking this into consideration, a single accident or hospital visit could wreak havoc on your savings. If you’re eligible, make sure that you apply for Medicare benefits within three months of your 65th birthday.
- Filing for Social Security before looking at all your options.
For those that are eligible for Social Security, it’s crucial to determine a strategy for your filings. The US government recently changed some parts of Social Security in the Bipartisan Budget Act of 2015, but these strategies are still open to certain individuals. If you’ll be 66 before May 2016 and haven’t filed yet, you’ve got until May 1st to enroll in File and Suspend. For those individuals who were 62 at the end of 2015, you’ll be able to file for spousal benefits when you reach full retirement age. For a couple that’s eligible for both of these options, not strategically filing could cost you thousands of dollars over the course of your retirement.
- Underestimating your costs in retirement.
Retirement can be a wonderful time for you to start enjoying the experiences you didn’t have time for whilst you were in the workforce. Unfortunately, your living expenses typically don’t decrease just because you’re income has diminished. Why? There are plenty of reasons, but as humans we get acclimated to a certain level of spending and that often doesn’t decrease when we retire. The expenses we have while working get replaced by retirement expenses. When planning for your retirement, assume your spending will increase with inflation each year.
- Not saving enough, as early as possible.
Talking about retirement can make the calmest person worry. The earlier you start to save, the more of an impact compounding will have on your portfolio. I used to be a daily Starbucks drinker. Theoretically, if I was consuming a $5 latte every day for 30 years, that would cost me $54,750. If I had invested that money instead with a 10% annual return I would have earned $288,874.16 in total returns, bringing the investment value to $343,594.16. That simple $5/day investment could generate more than a quarter of a million dollars in investment returns. This is a potent example displaying that investing earlier in your life can significantly amplify the effect that compounding has on your portfolio.
- Not taking inflation into consideration when selecting your investments.
Without having a solid understanding of basic financial principles, individuals often overlook the rate of inflation. Certificates of deposit, Treasury bonds, and savings accounts have the benefit of being low risk but also have the disadvantage of locking in negative real rates of return. Real return is one’s return after the effects of inflation are taken into account. When looking at the information provided by the Bureau of Labor Statistics, one can see that core inflation has ranged from 0.1% (2008) to 4.1% (2007) over the past 10 years. Keep in mind that it has been below 2% in 6 of the past 7 years. This points to the fact that inflation has been quite tame recently. In summary, without a rate of return above current inflation you are losing to inflation and your purchasing power weakens year after year.
- Not rebalancing your portfolio regularly.
Rebalancing is a key for your financial health, because it keeps your assets at a comfortable risk tolerance. We typically recommend that a portfolio rebalance takes place 1-4 times a year. Any more than that and you may be spending a sizable amount of money on trading costs; rebalancing any less can expose you to unnecessary risk. Reducing your “winning” investments and bumping up your position in “losing” investments (that you still have conviction in) will keep your portfolio balanced and help take the emotion out of investment decision making.
- Getting out of the market after a downturn.
After the volatility that we’ve seen recently, it can be hard for individual investors to stay optimistic. The beginning of 2016 has been the most turbulent beginning in the stock market since 2009. One chart that helps to provide some perspective on intra-year declines comes from JP Morgan’s “Guide to the Markets.” This chart is affectionately called the “measles” chart (because of its coloring). It points out the largest intra-year decline, and the total return for that year. What we’ve seen this year in the market isn’t new; as the chart mentions, the average intra-year decline for the past 35 years is more than 14%. Liquidating your portfolio when the market is down is, more often that not, detrimental to your financial stability for retirement. Staying the course and focusing on the long-term can help you from making decisions that are hazardous to your wealth.
Opinions expressed herein are subject to change without notice. Wolf Group Capital Advisors, or one or more of its officers or employees, may have a position in the securities discussed herein, and may purchase or sell such securities from time to time.
Additional information, including management fees and expenses, is provided on Wolf Group Capital Advisors’ Form ADV Part 2. As with any investment strategy, there is potential for profit as well as the possibility of loss. Past performance is not a guarantee of future results.
Copyright © 2016, by Wolf Group Capital Advisors