As a fiduciary financial advisor, I help my clients achieve their financial goals and ensure a safe path to retirement. I often encounter issues, which if not resolved on time, can impose serious threats to meeting these life objectives. In this article, I would like to share some of my experience and guide you through some of the major mistakes in personal retirement planning.
Complacency is one of the worst enemies when planning for retirement. Feeling that you are all set and do not need to change anything cause you many headaches in the future. We all have blind spots. Taking a second look will help you see some of the threats to your long-term plan that you have not noticed earlier.
2. Fear of asking the right questions
Many of us are afraid to ask the tough questions. “Am I on the right track?” What is my risk tolerance?”, “Is my advisor working in my best interest?” are just a few of the questions you can try to find the answer to. While the reality of truth might be harsh, addressing these issues sooner rather than later, is critical.
3. Over dependency on one source
Some folks are completely relying on a single source for their retirement being that social security, work pension or 401k plan. With social security running out of money and many pension plans shutting down or running a huge deficit, the burden will be on ourselves to provide us with reliable income during retirement years.
4. Not saving enough
According to a recent article by Chicago Tribune, only 18% of the people feel confident that have enough money saved for retirement. That is a scary number. It means that 82% of the US population is not prepared financially for retirement. They will not have enough funds to replace their current income when retire.
5. Portfolio not aligned with objectives
One common problem I see in my prospect client portfolios is the mismatch between investment allocation and personal goals and risk tolerance. I often see portfolios that are either too aggressive or too conservative or sometimes just hold too much cash. Aligning your investments and retirement savings with your goals will ensure that you are taking the right amount of risk to make them happen.
6. Lack of diversification
Another common problem I see among clients is the lack of diversification. Many portfolios are heavily invested in a single asset class, a target retirement fund or an index fund.
Diversification is the only free lunch you can get in investing and will help decrease the overall risk of your portfolio. Adding uncorrelated asset classes such as small-cap, international and emerging market stocks, bonds, and commodities will reduce the volatility of your investments without sacrificing much of the expected return in the long run.
Owning too much of one stock or a fund can cause significant issues to your retirement savings. Just ask the folks who worked for Enron or Lehman Brothers and had their employer stocks in their retirement plans. Their lifetime savings were wiped out overnight when these companies filed for bankruptcy.
8. Not rebalancing
Regular rebalancing ensures that your portfolio stays within your risk tolerance level. While tempting to keep an asset class that has been on the rise, not rebalancing to your original target allocation can significantly increase the risk of your investments.
9. Paying high fees
Paying high fees for mutual funds or even a financial advisor can eat up a lot of your return. It is crucial to invest in active funds that can produce superior returns net of fees. If you own a fund that has consistently underperformed the market or their asset class after paying for fees, you probably should not be in that fund. Similarly, paying fees to a financial advisor should bring you a bigger value than if you would have achieved by doing it alone. If you do not feel that you are getting a good value for your buck, maybe it is time for a change.
10. Over reliance on technology
Technology in this age is incredible and developing fast. However, we are human beings, and phone apps and web tools cannot answer all our questions. They might give you a good guideline but cannot capture all aspects of your life.
11. Lack of tax planning
Long-term investing will produce gains, and many of these gains will be taxable. As you grow our retirement saving the complexity of assets will increase. And therefore the tax impact of using your investment portfolio for retirement income can be substantial. Building a long-term strategy with a focus on taxes can optimize your after-tax returns when you liquidate your investments.
12. Lack of estate planning
Many people want to leave some legacy behind them. Building a robust estate plan will make that happen. Whether you want to leave something to your children or grandchildren or make a large contribution to your favorite foundation, estate and financial planning is important to secure your best interests and maximize the benefits for yourself and your beneficiaries.
13. Lack of exit planning
Good exit planning is especially critical for business or real estate owners who want to use their accumulated assets for financing their retirement. Unlike liquid investments in stocks and bonds, corporations and real estate are a lot harder to divest and doing may have serious tax and legal consequences. Having a solid exit plan will ensure the smooth transition of ownership, business continuity, and optimized tax impact.
14. Not understanding the big picture
Between our family life, friends, personal interests, causes, job, real estate properties, retirement portfolio, insurance and so on, our lives become a web of interconnected relationships. Above all is you as the primary driver of your fortune. Any change of this structure can positively or adversely impact the other pieces. Putting all elements together and building a comprehensive picture of your financial life will help you manage these relationships in the best possible way.
15. Not getting help
Some people are very self-driven and do very well on managing their own retirements. Others who are occupied with their career or family may not have the time or ability to deal with complexities of financial planning. Seeking help from a fiduciary financial planner or wealth advisor is normal. These folks will keep you on track, watch out for your blind spots and help you meet your personal and financial goals.
About the author: Stoyan Panayotov, CFA is a fee-only financial advisor based in Walnut Creek, CA. His firm Babylon Wealth Management offers fiduciary investment management and financial planning services to individuals and families.