If You’re Making These 3 Common Retirement Mistakes, You May Be Putting Your Future Security at Risk, Kiplinger Warns
None of us has a crystal ball, so as we plan for our retirement future, we have to do our best to anticipate the circumstances that could jeopardize our financial security. We do our best to save and invest so that we’ll have enough resources to fund the retirement we’re hoping for. Still, it’s easy to grow complacent, especially when markets are fairly healthy and the economic outlook is positive. In this recent Kiplinger article, financial advisor Ken Heise of St. Louis warns of three common retirement mistakes that complacent people make – thereby threatening to derail their carefully laid plans for the future.
Pitfalls Await the Unwary
Heise writes, “People who faithfully stash away money for retirement do so in hopes that their post-working years will be, relatively speaking, a stress-free environment where they can enjoy the fruits of decades of hard work without concerns about running low on cash. But pitfalls lie in wait for the unwary.”
In Heise’s view, there are three financial mistakes many retirees (or those retiring soon) tend to make. As we take a look at Heise’s list, bear in mind something Rajiv Nagaich of AgingOptions always recommends: a financial dashboard. By developing and utilizing this powerful planning tool, in consultation with a qualified financial planner, we’re confident you’ll be better able to avoid the stumbling blocks Heise warns about. Meanwhile, let’s consider his list.
Pitfall #1: Investing Like You’re Still Working
While Heise understands how aggressive, risk-taking investment can become habitual during your working years, he is clear that a new mindset and behavioral change are needed as you approach retirement.
“Portfolio growth is no longer the top priority,” Heise writes. “Instead, it becomes more important to preserve what you have and think about creating income for your retirement.”
Pushing your aggressive investing through into what Heise calls the “retirement red zone” – an five years before and five years after your ideal retirement age – can lead from one bad investment habit to another: withdrawing from your investments as a source of income to replace your weekly paychecks. That leaves you susceptible to all kinds of financial dangers, such as recession, market crashes, and accounts quickly drained by your frequent withdrawals with no way to staunch the flow.
The remedy for this, in Heise’s view, is to start reducing your stock exposure as you get closer to your target retirement age. The less you rely on aggressive investing, the better. This is another place where a good financial planner and a customized financial dashboard can help.
Pitfall #2: Failing to Avoid a Big Drop in Your Portfolio.
Heise once again turns his attention to the retirement red zone for this next pitfall. Market drops can happen at any time, and proactivity is the key to avoiding a massive dent in your portfolio. You don’t want to be “scrambling” to fix investment problems while you’re in retirement, because according to Heise, “At that point, it’s too late.”
The “first half” of the retirement red zone – about five years before your retirement – is the ideal time to strategically move your money from the fickle whims of the market to more stable assets. Heise suggests CDs, bonds, or fixed-index annuities. This is especially important to do after a big gain: rebalancing your portfolio after “big wins” to make sure you don’t lose those gains is key before and during retirement. This isn’t to say you should completely pull away from stock exposure, but it shouldn’t be your main focus. If something goes awry, you don’t want to be beholden to the market for your retirement security.
Heise advises, “Work with your financial professional to make sure you understand your potential portfolio losses and to make sure your plan will still fund your retirement needs for 30 to 35 years, even with a big market drop.” A professional can help you determine how to best mitigate potential losses to avoid any real damage to your portfolio.
Pitfall #3: Thinking Retirement Means a Lower Tax Bracket
According to Heise, it is a popular myth that entering retirement automatically means entering a lower tax bracket, and many people plan with this myth in their minds. But this can be a rude awakening for retirees, especially if their money is kept in tax-deferred accounts, like a 401(k), which is extremely common. Heise warns, “[I]f all your money is in a 401(k), and like most people you would prefer to have more income in retirement than you do now, you are never going to be in a lower tax bracket. You’ll be in the same bracket – or possibly even a higher one.”
Planning ahead for higher taxes may seem like an exercise in misery, but it’s a wise move. In order to stay one step ahead, a good strategy is to move your money into a Roth IRA or an indexed life insurance product, where gains are tax-free. “You pay taxes as you make the conversion,” Heise writes, “but those taxes are likely to be less than you will pay if you defer them.”
A portfolio is not a plan. By being proactive about your movements as you near the retirement red zone and beyond, you can best assure that your money will stay yours long into your retirement years. Consulting a financial professional is always a great option for those who don’t feel confident managing these pitfalls on their own. But whatever you do, take control of your money before market forces do. Failing to act can lead to real damage. With a little forethought, you can head into your retirement years with confidence and calm.
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(originally reported at https://www.kiplinger.com)