Investing mistakes are easy to make.
Any American saving and investing for retirement is on the right track in principle by preparing for the future. But just because a retirement investment plan starts off in the right direction doesn’t mean it will end up at the intended destination. Mistakes, oversights or changes in circumstance can derail even the best retirement plan. Instead of simply hoping for the best, it’s a good idea for retirement investors to consider each of these seven potential problems and prepare for — or avoid — each one.
Being too safe.
It can be scary and difficult to invest hard-earned money in volatile assets that could easily lose value. Cautious investors often see stocks as particularly risky. After all, the Standard and Poor’s 500 index lost nearly half its value within a year’s time as recently as 2008. It may seem appealing to invest entirely in low-risk investments such as certificates of deposit or long-term Treasury bonds, but being too risk-averse can make retirement goals even more difficult to reach. Rely on diversification and patience to limit risk, and don’t shy away from the high-return stock market too much.
Not having a well-defined plan.
The stock market demonstrated historically low volatility in 2017. When financial markets are calm, it may seem like there’s no reason to stress over retirement investing. Most stocks, exchange-traded funds, mutual funds and other investments have been on the rise since 2009, and most retirement portfolios have been too. But inconsistent, ill-prepared investing plans typically result in inconsistent investing results. Investors should never adopt a “just wing it” attitude when it comes to retirement. If the economy takes a downturn in the future, retirement investors don’t want to be scrambling to make critical investing decisions in real time.
Thinking too short-term.
Perhaps the only thing worse than being too conservative with retirement investing is being too aggressive. There’s no shortage of analysts and expert commentators online and on financial news shows making stock picks of the week. For the average retirement investor, this type of short-term thinking is practically useless. Younger investors need investments that will perform for decades, not weeks. Older investors shouldn’t be making short-term bets with retirement just around the corner. Buying and selling stocks in an attempt to time the short-term swings in the market can be extremely difficult, even for professional traders.
Ignoring the time horizon.
Time can be an investor’s best friend or worst enemy. Younger retirement investors can capitalize on the remarkably consistent long-term growth of the U.S. stock market. It may seem like the stock market is risky, but the rolling 30-year annual return of the S&P 500 index has consistently stayed between about 8 and 15 percent since 1926. Compounding dividends and returns also help to grow wealth over a long enough time horizon. As older investors approach their retirement targets, a shorter time horizon calls for less investing risk. Investors should reduce exposure to volatile assets.
Mismanaging your taxes.
A huge part of successful retirement investing is minimizing Uncle Sam’s take. Properly managing taxes starts with choosing the right type of retirement account. The right kinds of 401(k) plans and individual retirement accounts allow investors to defer taxes on a portion of their income. Not only can that tax break increase the compound returns of a portfolio, it can also allow Americans to pay a lower rate on invested income when they withdraw their funds after retiring. As an added bonus, many employers will match a percentage of their employees’ retirement plan contributions.
Being unprepared for life changes.
By the time Americans begin saving and investing for retirement, they have lived long enough to know that sometimes the universe throws curveballs. Even if work, family, expenses, and retirement all seem on track, it’s still a good idea to mentally and financially plan for the unexpected. Divorce, family death, job loss, illness and natural disasters are just some of the many unpredictable life events that can turn an otherwise solid retirement plan upside down. No plan is bulletproof, but sometimes protecting retirement savings can be as simple as meeting with a lawyer or buying a better insurance plan.
Going it alone.
Investing can be very complicated. Even the smartest retirement investors can have a difficult time understanding the nuances of stock, ETF and bond investing. Rather than shouldering the entire burden of your financial future yourself, it’s always a good idea to meet with a financial advisor. Even the savviest investors can overlook a detail or misread a line of fine print. Even best-selling authors have an editor to check their work. No matter how meticulously researched a personal retirement plan is, getting a third-party seal of approval can provide priceless peace of mind.
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7 Things That Can Derail Your Retirement Investing originally appeared on usnews.com
