“I won’t need that much in retirement, and social security will be enough anyway: it is ages away, and I’ll leave it up to financial advisor who’ll put it all in secure investments.”
In this sentence are five of the eight common mistakes people make when investing and saving for their retirement.
This article will sharpen up your retirement saving know-how, combining common-sense tips and shrewd investment advice.
1. I won’t need to spend as much in retirement
While this could be true, it could be very dangerous to bank on it.
What if your health deteriorates and your health care costs increase?
How about traveling? Many retirees find that all the free time gives them need to explore, how will it be funded?
What about paying off your mortgage?
What if your children or grandchildren need emergency financial assistance?
It’s clear that while you won’t have as many planned costs, surprises can always throw a spanner in the works and leave you wishing you’d saved more.
Your spending habits will certainly change, but assuming they are guaranteed to decrease could prove risky.
The following graph shows that the median percentage change of the expenses upon retirement is very close to 0%.
This means that spending remains largely the same for most people and even increases for a large portion (area above median).
2. Social Security will cover anything I need
This is the most obviously erroneous assumption.
Social security covers only the most basic costs.
While it might be enough to cover your mortgage and your utility expenses, good luck going traveling or living a comfortable life.
An article in Time recently claimed that one in four Americans have made this very mistake and saved nothing for retirement.
That is higher than the number of Americans working just enough to scrape a living, so we can’t attribute this simply to not having had the funds to save.
Somewhere in that one in four, are people who have assumed that Uncle Sam is generous and benevolent, and will tide you over.
3. Investments are complicated, I’ll leave it all to an expert
Yes, the myriad of investment options can seem daunting at first.
But didn’t learning basic arithmetic at school seem like a challenge before you did it?
It’s important to be involved in your retirement investments, and not leave it all to a banker.
If you’ve spent more time looking at that vintage seventies record store than you have making sure your days in the sun are pleasant and comfortable, you need to sort your priorities out.
Ensuring you do the latter will also make browsing the store catalog that bit easier, as you’ll have more disposable income.
4. I should only invest in sure things
While this might seem logical, it’s an assumption that needs to be scrutinized for your particular case.
Many financial experts advise having a small proportion of your savings in equities, which carry more risk.
This is especially true if a portfolio with no market risk will be enough to tide you over.
Go through this with your financial advisor.
And, as you will see later, equities are increasingly seen as less risky in the long term, should you stick with them.
Essentially, in the long run, all markets grow, and so you will see returns, even if the ride is a bumpier one.
5. When it comes to stocks, I can better predict tomorrow’s price than, say, ten years from now, so I should think short term
There is plenty of research that goes against this idea.
Buy and Hold, the tactic of buying investments and then sitting on them regardless of market fluctuations, is an investment philosophy gaining more and more traction.
Stocks, on the whole, have risen over time, and it is very rare to find a ten-year period in which an investment in stocks resulted in negative returns.
In investing, the long term has often meant three, five or ten-year holding periods.
This might not be long term enough.
Brian Belski, chief investment strategist at Oppenheimer, states that investment strategies with longer horizons yield stronger returns, citing historical evidence to support this.
6. As long as I don’t sell that losing stock, I haven’t technically made a loss
This is plain wishful thinking.
While you might not be able to claim a loss, your investments are as real and tangible as the money in your bank.
This is connected to our next misconception.
7. Hold on to your investment, rather than selling it and buying back
Notwithstanding our earlier point about thinking long term, sometimes it’s wise and advisable to sell a stock and buy it back at another point.
This will allow you to claim a capital loss and get a tax deduction.
Just don’t buy and sell (or vice versa) the same stock within thirty days of the sale or purchase, as IRS rules render the capital loss claim void in this instance.
8. Retirement is so far away; I can do it later
This is probably the most common mistake made.
Many apply the same logic to planning retirement savings as they do to something like painting the fence or fixing that pesky leak.
It’s the whole I’ll-do-it-tomorrow mentality.
The thing about the latter two, is, unless they’re impacting your life in a meaningful way, you CAN put it off and not worry too much about the consequences.
Retirement planning, however, is a long-term game.
Investments need time to grow and reap the fruits on offer.
Thus, every day without a coherent investment plan is a day less for those retirement investments to compound and grow over time.
It’s a long-haul game, so don’t treat it like a quick task that can be done at any time.
The sooner, the better.
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