The roadmap to retirement planning can be filled with potholes, detours, missed exits and major accidents. There’s no fail-safe GPS; a complicated and unstable economy makes it more difficult to plot a sound financial course than it was for previous generations.
Volatile stocks, disappearing pensions and the uncertainty of government-backed programs such as Social Security and Medicare give pre-retirees a host of crucial nest-egg variables to weigh and balance. Mistakes can be costly. The average life expectancy is significantly longer than decades ago, and some retirees may need funds to sustain them for 30-plus years.
With so much up in the air, it’s generally best to keep your feet on the ground. If we know there’s a possibility of a money shortage in our older years, then more than ever it makes sense to conserve what we have while accumulating as much as possible without risk.
Of course, the big question is how to do that.
As a starting point, let’s look at four big financial mistakes pre-retirees make:
- Carrying too much risk. Many investors have short memories, almost suffering from amnesia about the devastating 2008 financial crisis. They’ve allowed their equity allocation to drift to a greater percentage outside their comfort zone. One of the most common mistakes is an overexposure to company stock. Some people are loyal to a fault. Large company stocks as a group have lost money on average about one out of every three years.
- Hoarding cash. Many people don’t know where to put their money, so they let it sit in cash because of their market fear. What most don’t realize is that this money is being devalued due to inflation. Cash equivalents – savings deposits, CDs, Treasury bills, money market – are safe but offer lower returns than stocks and bonds.
- Having tunnel vision with stocks and bonds. Annuities can be a solid alternative or supplement. With pensions almost as outdated as rotary phones, annuities have come more into play for retirement planning, according to a report by the Government Accountability Office. The report noted the growing concern of retirees outliving their assets, and advised those without traditional pensions to delay taking Social Security and to consider an annuity. Both can be inflation-protected while providing income for life; in other words, a true pension.
- Inadequately addressing healthcare. Whether it’s through insurance or setting aside money specifically for healthcare, many don’t sufficiently plan for this crucial retirement necessity. Those with high-deductible health plans should consider building a cash reserve for healthcare expenses by contributing to a Health Savings Account (HSA). Even if not offered through your employer, HSAs are still available through websites such as healthsavings.com or through various banks.
Retirement planning is not about picking the next hot stock, or getting in and out of the market at the right time. Portfolio management techniques are available that allow for safety and growth at the same time.
Richard W. Paul is the president of Richard Paul & Associates, LLC and the author of “The Baby Boomers' Retirement Survival Guide: How to Navigate Through the Turbulent Times Ahead.” He is a Certified Financial PlannerTM professional, Registered Financial Consultant, Investment Adviser Representative and an insurance professional holding life and health insurance licenses in Michigan and Florida.
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