We work hard in our careers in order to, hopefully, experience a comfortable retirement. Regardless of our definition of wealth, most of us want to protect what we’ve worked hard to earn and enjoy the fruits of our labor. But even if you’ve been saving for decades, there are seemingly small decisions and behaviors that could put your retirement savings at risk.
Whether you’re about to retire or are ten years out, avoid making these five common mistakes that could result in a diminishing nest egg.
1. Underestimating Your Retirement Income Needs
One of the most common mistakes I’ve seen people make is underestimating just how much they’ll need. A million dollars may sound like a lot, but what if you spend 30 years in retirement, fall ill, or need to financially assist one of your kids? What if healthcare costs change or taxes increase?
The best way to avoid financial stress in retirement is to set up contingency funds to cover the unexpected, and work with your financial advisor to map out various retirement scenarios to see what your savings can handle. You may find that you’re on track, or you may determine that you want to save more to feel secure enough to retire.
2. Borrowing From Your Retirement Savings
A Transamerica retirement study found that 23% of people have dipped into their retirement plan to pay for an unexpected expense. (1) When your immediate emergency seems dire, people forget to consider the huge impact this action can have on your retirement savings.
If you borrow from your 401(k), you’re subject to double taxation on the interest. Even though the money you borrow is tax-exempt, the loan interest must be repaid with after-tax funds. And when you withdraw your funds in retirement, you’re taxed again. Worse still, if you leave your job or are fired, you are required to pay back the loan within 60 days or you’ll be subject to income tax and a 10% penalty if you’re under the age of 59½. Additionally, you lose out on the growth potential and compound interest.
Rather than put your nest egg at risk, create an emergency savings account to pay for any immediate, unexpected needs.
3. Neglecting to Focus on the Long-Term
It’s all too easy to get swept up by the lure of active markets and promises of big returns. However, for someone preparing for retirement, it’s much more appropriate to focus on a long-term strategy. The markets fluctuate every day, and if you try to beat the market, you can cause yourself unnecessary stress and potentially cause damage to your savings.
It makes more sense to develop an investment philosophy based on your goals and risk tolerance, and stick to it regardless of market activity. A 2015 Dalbar study shows how playing the market leads to underperformance. Buying high and selling low due to panic lowers your overall return and may jeopardize your retirement. Instead, keep a long-term perspective and a disciplined approach.
4. Putting All Your Eggs In One Basket
Diversification is one of the most talked about investment strategies for a reason. It protects your investments from market volatility. While you can’t eliminate risk from your portfolio entirely, you can cushion the blow if things go south. If you put too much of your money into one stock or even one sector of the economy, you put yourself in danger of losing your retirement savings.
Working with a professional, evaluate your portfolio’s current lineup and whether it needs to be rebalanced or diversified. Consider mixing up your stocks with global exposure and alternative investments. Look at the big picture of all your accounts, including employer-sponsored ones, and ensure you are diversified across the board.
5. Not Asking For Help
Investing and saving for retirement are huge tasks, and most people don’t have the time to learn the intricacies of the markets and retirement accounts. Don’t be afraid to ask for help when you need it.
At this point in your life, you need to work with an advisor who will help you create a written income plan and work through various retirement scenarios, not just help your money grow. An advisor can help you stick to a long-term strategy, keep emotions at bay, and provide you with guidance and advice that you can’t put a price on.
The Next Step
At Grace Wealth Management Group, we provide individuals, families, and business owners with a custom-tailored financial roadmap designed to guide them toward their retirement goals. We can work with you and your family to assess your total financial security planning needs, considering significant milestones such as major purchases, children, education, dreams and, retirement. To take the first step in protecting your hard-earned retirement savings, call (949) 631-3840 or email jpeters@cfiemail.com.
About Jim Peters
Jim Peters is an independent financial advisor and the founder of Grace Wealth Management Group, Inc., a full-service financial firm committed to helping people pursue their financial goals. With more than 24 years of experience in the industry, Jim combines his extensive knowledge with his genuine interest in helping people pursue financial independence. Beyond his experience, he is certified as both a Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®), meaning he has advanced training and knowledge in financial planning and insurance. Based in Irvine, California, Jim specializes in working with individuals, families, and businesses throughout Orange County. To learn more, connect with Jim onLinkedIn or visitwww.financialadvisorirvine.com.
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