Retirement Killers: Avoid the top 6 retirement investment mistakes

Retirement is the number one goal of investors.

Yet, looking at the numbers, it’s clear that many investors are undermining their good intentions with unfortunate actions in their retirement plan.  

Here are five mistakes to avoid if you want your retirement dreams to become a reality.

1.  Cracking your nest egg before retirement.  A study by Hewitt Associates found that 45% of workers cash in their 401(k)s when they switch jobs.  In other words, they take the money — paying income taxes and a 10% penalty if they’re not yet 59 1/2 years old — rather than leave it in a retirement account.  That’s no way to build the retirement of your dreams.  When you change jobs, you can transfer the money in your employer-sponsored retirement plan to an IRA.

2.  Spending your retirement savings too fast. If you’ve made it to retirement, congratulations.  You’ve amassed enough money to create your own portfolio-generated paycheck.  Excellent work.  But you can’t take it too easy, because you’ll receive a severe pay cut if you deplete your portfolio too fast.  How much can you take out each year and be almost certain that you won’t outlive your savings?  Just 4% a year.  That’s the withdrawal rate that would have sustained a mix of stocks and bonds over most 30-year historical periods. Sure, if you retire on the eve of the next bull market, you can take out more.  However, if you quit working right before the next bear market, then taking out more than 4% a year could have your portfolio beating you to the grave.

3.  Trying too hard to beat the market.  You basically have two choices: You can be a master stock-picker like Warren Buffett or Peter Lynch and try to find the next Wal-Mart.  Or you can broadly diversify your assets, mostly via low-cost index funds. This way, you enjoy hefty exposure to all the great companies.

4.  Paying too much for help.  There’s nothing wrong with getting financial advice.  But I firmly, strongly, passionately believe that such help should be objective and affordable.  Paying too much for advice (especially if it’s bad or at least conflicted) does a lot for your broker’s retirement, not yours.  Paying just 1% a year on a $100,000 portfolio over 20 years could result in your forking over more than that amount in fees. That’s a hundred grand that could have been in your pocket. Of course, if the advice you received had your portfolio performing better than what you could do on your own, then the price might be worth it.  But if you’re paying 1% or 2% a year to lose to an index fund — as most mutual fund managers do — then you’re better off taking control of your own investments.

5. Retiring permanently when you really just needed a break.  If you’re in your 60s, you should plan on living at least another two decades.  Can you stand full-time leisure for 20 years?  Sure, it may sound good now, but many retirees find they get pretty bored after a while.  But by then, they have already severed many of their professional ties.  Before you decide to retire fully and permanently, discuss a phased or gradual retirement with your employer and/or business partners.  Or the possibility of working on a project basis, allowing you to take several months off each year. Or maybe just a one-year sabbatical. Explore your options before you no longer have them.

6. Retirement planning is easy.  Much easier than you have been led to believe by the investerati.  Check back next time for some great retirement tips or see them now here.

Japan Disaster and Investing On Your Own

The terrible disaster in Japan reminds us that investing is never easy.  This is a human tragedy for sure and to think of ones financial situation now seems kind of petty.

The earthquake, tsunami and subsequent nuclear plant issues are just some of the absolutely unpredictable events that affect investors at every level, whether you invest yourself or utilizing a stockbroker or financial advisor.

The Japan disaster is a reminder that markets are indeed global and investing is never ever easy.

The best that we can do is have a long term strategy that includes; a) saving the most that we possibly can and b) investing some of that in the lowest cost possible funds or exchange traded funds for the long term.

Every study on the subject conclusively proves that fees and costs are by far the number one factor in determining investing success.  This is why exchange traded funds and index funds are favored by this author. 

Simple index fund investing which is called passive investing will ultimately beat over 90% of the people who insist on buying, selling, trading, etc which is called active investing.   Simple index fund investing by definition is easy too. 

Investing is truly one of the few things in life where less is more!!!