The Big Five: Avoid These Retirement Planning Mistakes

It's easy to stumble into retirement planning pitfalls that can turn your dream retirement into a nightmare!

Let's explore five of the most common errors individuals make when planning for retirement. I'll spotlight these mistakes using typical phrases people say when making them so you can sidestep these traps in your own retirement planning.

1. “I’m just going to save now and figure out a plan later.”

This one bears repeating: simply socking away money is not enough to fund your lifestyle during retirement. This approach can leave you in a precarious position!

In the decades before retiring, it's crucial to make a thorough plan that outlines your goals and the resources you have available to reach them. This strategy provides a clear and stress-free pathway to transition into retirement.

Before diving into the nitty-gritty of investment strategies with my clients, we put in the effort to construct an in-depth plan of what they want their retirement will look like. I can then gear the investments with those objectives in mind. This proactive planning can mean the difference between a comfortable retirement and one full of financial stress.

2. “I don’t think it matters how my portfolio is allocated…”

Just as no two individuals are alike, no two investment portfolios should be identical. The mistake of improper investment allocation (how your assets are divided among different types of investments) often occurs! When an individual's goals evolve, or their financial situation changes, but their investment strategy remains the same, this spells trouble.

For example, suppose you plan to use a portion of your funds to make a down payment on a house within the next nine months. In that case, some of your assets should be invested more conservatively than the funds you don't intend to touch for 20+ years.

Investing always comes with a degree of risk, but tailoring your investment strategy to align with your goals can help mitigate the risk as much as possible. By ensuring that your portfolio is diversified and appropriate for your time horizon and risk tolerance, you are better situated to weather market fluctuations and stay on track toward achieving your retirement goals.

3. “Can’t I borrow from my IRA for that new car?”

Pulling out money too soon from accounts like 401(k)s or IRAs can cause big problems. If you withdraw these funds before 59 1/2, you must pay a 10% penalty. On top of that, the withdrawal is also taxed as ordinary income, which could push you into a higher tax bracket, significantly increasing your tax liability.

Only take money out of retirement accounts early if there is absolutely no other option. Life can often throw curveballs, but it's advisable to exhaust all other options before taking this step. The goal is always to protect your retirement savings!

4. “Sell all of my stock now, the market is crashing!”

Investing is not just about money, but feelings too. The ups and downs of the markets can cause many emotions, especially when investors see significant changes in their investment values.

Letting investments become an emotional roller coaster can sometimes lead to rash decisions that don't align with long-term financial goals. The secret to good investing is making smart choices and keeping emotions in check.

When markets are shaky, reviewing your financial plan is essential instead of making snap decisions. Check if your current approach still fits your long-term goals. If changes are needed, make them thoughtfully, not rashly.

Above all else, your investment portfolio should be calibrated so that it aligns not just with your financial aspirations but also with your comfort with risk. Some people are naturally comfortable with a high-risk approach, while others prefer to be conservative. The key is to prevent emotions from undermining your investment strategy, ensuring that you remain on track toward achieving your retirement goals.

5. “I got a hot tip; buy [insert company] stock today!”

"My buddy said…" This phrase might be my favorite (or least favorite) phrase I hear regarding retirement planning. We all know that person who never fails to gush about their latest investment victory. However, they usually don't mention the investment endeavors that didn't pan out quite well—because, let's face it, that's not as exciting. Remember, despite their apparent success in investing, your friend likely doesn’t know the big picture of your financial situation or investment goals.

At the end of the day, free advice is worth exactly what it costs. When planning for your retirement, it's important to rely on expert advice tailored to your specific circumstances rather than the sporadic success stories of your peers. In doing so, you ensure that your retirement plan aligns with your individual financial goals, risk tolerance, and timeline, setting you toward a comfortable and financially secure retirement.

The Advantages of a Professional Wealth Advisor

Working with a professional Wealth Advisor can help you to avoid these common retirement planning errors. Starting with a well-structured strategy and then collaboratively adjusting and refining this strategy over time greatly enhances the possibility of achieving your ideal retirement.

Remember that financial planning is not a one-size-fits-all approach. Each individual requires a strategy tailored to their unique financial circumstances, retirement goals, and risk tolerance. The guidance of a professional is a crucial tool in navigating this complex process, ultimately leading you toward a retirement that is both secure and fulfilling.