Many investors see retirement as the goal line, the point after which you can coast along on your portfolio with little worry, no retirement investment mistakes ahead to make.
After all, you’ve arrived, right? Yes, and you can lose that money, too. If anything, retirement is the time when you it pays to take more, not less, care of your investments.
Here are five retirement investment mistakes to avoid at all costs:
1. Overspending in the first few years
Many times, new retirees “celebrate” their change of life by taking on new debts in the form of a larger home, new cars or extravagant vacations. Then the stock market hands them a down quarter and things get tight.
The fix: Build a no-frills survival budget and live on it the first 18 months. Setting your spending levels firmly will help you avoid major problems down the road.
2. Falling into the annuity trap
Retirees often roll money out of company 401(k) plans and then realize that they have no experience with investing and little will to learn. So they become easy prey for salesmen offering annuities that promise worry-free, seemingly risk-free money management. Once the retiree realizes the cost of built-in annuity fees, it’s too late to get out without paying a stiff penalty.
The fix: Make no major changes for at least six months after leaving work, other than perhaps doing the rollover into an IRA. Then carefully consider all of your options, perhaps with the help of a “fee only” financial advisor who doesn’t derive his or her income from sales commissions.
3. Underestimating the corrosive power of inflation
Many new retirees fail to understand how much they will need in retirement. Then they also drastically underestimate how long their purchasing power will hold up over decades of life in retirement.
The fix: In ideal markets, it takes 7 years to double your money and about 25 years for it to lose half its value from inflation. Accordingly, the best long-term investment portfolio will bring you a return above inflation with as little risk as possible.
4. Owning far too much high-risk stock
What better hobby in retirement than picking stocks? Unfortunately, the volatility that comes from a heavy equity position can play havoc with your emotions, leading to panic selling and other dangerous outcomes.
The fix: Dial back risk and rely instead on a portfolio of bonds, real estate and dividend-paying blue chip stocks to reduce the risk of panic.
5. Owning far too little equities for your age
If your portfolio is bonds only, you run the risk of losing ground to inflation (No. 3) or panicking if rates rise and bond values plummet (No. 4).
The fix: A small percentage of equities can bring you the extra bump of return you need to offset rising inflation over long periods, so keep at least some in your retirement portfolio.