How Many of These Retirement Investing Mistakes are You Making?

Source:UK.guardian

This list found in AAII Journal (7/2013, p.4) was taken from Bankrate.com's "7 Retirement Investing Mistakes."  Both of these sites are of interest to DIY investors and are worth checking out.  I have added my comments in bold.

One way to avoid these mistakes is to participate  in the online book discussion of Millionaire Teacher which is at the half-way point.

1. Not Taking Full Advantage of Tax Breaks:  Tax-favorable accounts, including 401(k) plans and individual retirement accounts (IRAs), allow savings to grow tax-free; yet many workers do not take advantage of them.  Two simple tax rules to keep in mind:  pay less tax and put off paying taxes as long as possible.  For example, pay less taxes by seeking long-term cap gains and qualified dividends.  Avoid taxes until you withdraw funds by using tax-qualified investment accounts.  If the 401(k) has any kind of a match, swoop up the free money.  This isn't rocket science.

2. Not saving enough, or at all:  Saving 9% of one's salary (including employer matching contributions) may not be enough, especially for those starting late or having gaps in their employment.  Plus, more than 80% of those surveyed by TIAA-CREF said they weren't contributing to an IRA.  I talk to a lot of people about how they will generate an income when they are no longer working at their main occupation.  I have never run into anyone who has said they saved too much prior to retirement! If saving is a problem, there are really good books and websites on how to become more frugal. Ask me and I'll recommend a few.

3. High Fees in Retirement Plans and Investments:  High fees can negate any outperformance, so it is important for savers to be aware of them and to look for low-cost alternatives.  Put on a blindfold, pick up a dart and throw it at this blog.  Chances are you'll hit a post on this very topic.  LOW COST INDEX FUNDS LOWER FEES.

4. Focusing on Only One Risk:  Nearly four in 10 people surveyed by Franklin Templeton believe they can get by without investing in stocks.  Yet, avoiding stocks increases longevity risk--the risk of outliving one's savings.  Not only that - if you think you are safely ensconced in money markets and Treasury bills and notes, YOU ARE BEING EATEN ALIVE BY INFLATION!  Hiding under the bed doesn't eliminate risk; it just increases another risk - of the roof falling on your head!

5.  Investing aimlessly:  It is not uncommon for investors to get aggressive when the market is going up, only to cut back on their holdings when stock prices fall.  Other investors are good at saving, but lack a long-term plan for managing their investments.  Another way to put this is that investors are in the habit of buying high and selling low.  This was a huge part of the impetus for the online discussion of Andrew Hallam's Millionaire Teacher.  It presents a well-thought-out approach to investing that buys low and sells high as part of the rebalancing of a well-thought-out asset allocation.

6.  Retiring With No Plan for Income:  Investors need to start adapting a more conservative allocation as they near retirement.  This typically means holding less in equities and more in bonds.  This is one of the main purposes of thinking hard about asset allocation.  At some point as investors move towards retirement, they need to do a back-of-the-envelope calculation to include Social Security, pension income, other income, and 4% of their nest egg.  If the resulting amount is not near (after adjusting for inflation) what they need in retirement, then adjustments have to be made. The day you turn 65 is too late for most people to do this calculation!

7.  Holding Onto the Hoarding Mentality:  Retirement portfolios are intended to be drawn down, a concept some retirees struggle with.  An immediate annuity can guarantee a stream of income, while using a 4% withdrawal rate, or similar strategy, can expose the portfolio to market volatility of the markets.  Nobody said this was easy.  You don't know how long you will live, what the rate of inflation will be, or how markets will behave (or not!).  There are tradeoffs no matter which direction you move.  The number one fear of retirees is that they will run out of money.  The trick is to overcome this fear and to seek to enjoy retirement.