Avoiding the three biggest retirement investing mistakes means taking the right amount of risk and understanding your goals
The recent plunge in the stock market has people thinking about their retirement goals and how they’re going to afford those goals. Ironically, the stress brings out some of the biggest retirement investing mistakes and takes them farther from their financial destination.
Fortunately, taking a step back to look at a few of the most common retirement mistakes can help to avoid committing those mistakes in your own portfolio. Check out these three biggest mistakes investors make and be one step closer to retirement happiness.
Retirement Investing Mistake #1: Being too Cautious
Many investors mistakenly assume that only the safest investments should be held in their retirement portfolio. They end up holding most of the portfolio in bonds and stocks of mature companies like utilities and consumer staples.
It can be a little scary watching your retirement portfolio drop as stock prices fall but few investments provide the upside return you’ll need to meet your financial goals. In fact, one legendary investor recently forecast that bonds will return just 3% annually over the next decade. That’s likely a return of just a percent after inflation and not nearly enough to grow your portfolio.
Adding stocks and precious metals to your retirement portfolio can give you the growth you need to beat inflation and meet your retirement goals. A new approach to retirement planning called the Bucket Approach can help balance the safety of bonds and provide upside return on stocks.
Retirement Investing Mistake #2: Not Understanding Your Investing Self
What did you do in 2008 and 2009? Did you freak out and sell your stocks at the bottom?
Don’t beat yourself up, most investors lost their head and sold out of investments before the rebound. Use the experience as a lesson to understand your investing self and tolerance for risk.
The VIX Volatility Index has jumped so far in 2016 and investors are on edge to get out before the inevitable crash that comes every five to ten years. Even if the market rebounds briefly, there’s a good chance the seven-year bull market could end this year. When that happens, you’re likely to repeat some of those bad investing behaviors if you have too much money in risky investments.
The fix to this retirement investing mistake may seem like a direct contradiction to the previous one. Should you take more risk for higher returns or avoid stocks to keep from panic-selling in the next market selloff? Don’t be confused, the answer is actually pretty simple.
Adopting the bucket approach to retirement planning will help make it through stock market weakness without risking your ability to pay expenses. Beyond separating your retirement investments into cash and return buckets, adjust your asset allocation according to your past investing behaviors.
Retirement Investing Mistake #3: Not Planning for All Your Goals
The majority of retirement planning seems to be planning to cover daily living expenses once you leave the rat race. For most people, this means replacing around 80% of their pre-retirement income to cover expenses. Using this number, investors work through retirement calculators to find how much they need to save and what return they need to their retirement.
The problem is that these investors get to retirement and have just enough to cover only the bare necessities, at best. They’ve planned to cover their expenses and that’s about all they can do.
That’s a pretty boring retirement.
Don’t forget to build in other retirement goals to find the amount you need through your golden years. Other goals include traveling, helping to pay educational expenses for the grandchildren, charitable giving, leaving an estate and starting that dream business you always wanted to launch. Besides these additional goals, make sure you understand how retirement spending changes as you age instead of basing your needs on an arbitrary rule-of-thumb.
Building in a few extra goals will help you get to the retirement you deserve.
Avoiding the biggest retirement investing mistakes means juggling a lot of ideas that may not be so easy to estimate. You’ll need to figure out how much you need to save and the right mix of stocks, bonds and precious metals to get you there. Fortunately, you don’t have to be exact in your retirement planning. Avoid these three mistakes and you’ll be well on your way to a happier and wealthier retirement.