Four Common Mistakes That Retirement Investors Make

By Gennaro A. Marsico, JD, CFP®, CIMA®

Retirement has important financial and psychological consequences. For some, it means more time with family, hobbies, and travel. For others it can be catching up on much needed rest and relaxation. Some of us jump into retirement with both feet and never look back. Others ease into retirement though consulting roles, phased-out work schedules, business transition plans, or enjoyable part-time employment. No matter what your retirement looks like, there are a few key mistakes to avoid that can help the likelihood of having a smoother and more successful journey.

Unrealistic Expectations

We all want to have our cake and eat it too. In an ideal world, we would invest all of our money in highreturning, risk-free investments with complete liquidity. Everyone wants a 10% return with zero risk or fluctuation. In real life, however, your rate of return is highly dependent upon the level of risk you are willing to accept. Lower-risk investments have lower rates of return. Higher-returning investments come with an increased risk of loss. In most cases, a retiree needs a mix of riskier growth-oriented investments (like stocks) combined with less risky investments (such as bonds or cash). There is a common misconception that when one retires, all of his assets should immediately be placed in low risk investments. However, this faulty reasoning fails to consider that retirement is not a one-day, one-year, or even a one-decade event. Rather it can span well over three-decades. Riskier growth assets help protect against the impact of rising future costs known as inflation as well as the risk of outliving your money (longevity). More conservative assets serve as a way to lower overall volatility, fulfill immediate income needs, and preserve principal for emergencies. The correct asset allocation is client-specific and dependent upon several factors including age, spending needs, health, legacy plans, and overall comfort level.

Focusing on the Short-Term

Too often investors focus on the daily movements of the markets instead of the long-term perspective. The performance of your portfolio over one day, week, month, or even one year is less important to your overall retirement success than how it performs over the next decade. Inevitably, every five to ten years, most investors will go through a bad year—maybe ever a very bad year. But keeping a long-term perspective will help you concentrate on the big picture and yield more fruitful results. A well-diversified portfolio can help you avoid the pitfall of short-term thinking by tempering the storm of volatility. Warren Buffet said, “The stock market is a device for transferring money from the impatient to the patient.” The patient investor never gets excited over a good day when her portfolio is up or nervous when she is suffering a bad market day. Remember the importance of a long-term time horizon with respect to your retirement nest egg. Don’t let the infrequent short periods of turbulence interfere with the long-term journey.

Timing the Market

If we all had a crystal ball or the ability to travel through time, retirement investing would be a mindless slam-dunk. Consistently timing the market (especially over a long period) is luck--not skill. Retirees who maintain a well-diversified portfolio through good market and bad market alike typically fair better than those who attempt to buy and sell at what they perceive as the “optimal” time. When you try to time the market you have to be correct twice—when you sell and when you get back in. The odds are not in your favor. Famed investor Peter Lynch said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” Avoid chasing winners when they are up or selling investments in a down market. Holding the course with a portfolio that is optimized to serve your retirement goals is likely the best strategy.

Spending Too Much Money

This last mistake seems obvious, but many retirees struggle with knowing how much income they can safely withdraw from their investments. For many years the financial service industry has vaguely promulgated the “5% rule” which was subsequently revised to a “4% rule”. However, the practical application of any spending rate is complicated by taking into consideration factor like age or length of retirement, adjustments for inflation, and sequence of returns. A retiree who starts drawing income at a younger age for a longer period of time has a much higher risk of depleting his retirement savings than an older retiree thereby necessitating a lower overall withdrawal rate. Additionally, the very first years of investment performance can have a positive impact if the portfolio happens to be up verses a negative outcome for a portfolio that is down while taking income distributions. The best way to mitigate the risk of depleting your portfolio is to budget by prioritizing your retirement goals into needs compared to wants, investing in an appropriately allocated portfolio, stress testing your goals against possible “whatif” scenarios, and continuously monitoring your progress.

Any opinions are those of Gennaro Marsico and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Asset allocation and diversification do not guarantee a profit nor protect against a loss. Raymond James and its advisors do not offer tax or legal advice. You should discuss tax or legal matters with the appropriate professional.