Avoid these retirement roadblocks
Does it seem that previous generations had an easier time figuring out retirement? You’re not imagining it. There are plenty of reasons why you have to plan better than your parents or grandparents.
Americans are living longer. That’s particularly true for people who are well educated or have been high earners. A person who retired at age 65 in 1980 had already beaten the average life expectancy for a person his or her age. There was not much question a few decades ago that an individual was, on average, limited to a few golden years. That’s a far cry from today’s expectation of at least another decade — and usually more — without a paycheck from work. Also, corporate pensions have all but died, and low interest rates are hurting some retirees who believe cash in the bank is a better choice than investing in the stock market. Cash in the bank will not keep up with inflation, which is a problem for those still unnerved by the 2008 market meltdown.
Add to that uncertainty about Social Security; the growing complexity of investment and insurance products; questions about taxes and how they affect your retirement, as well as your plans to gift money to family or charities; and general confusion about the financial services industry itself and who is best qualified to answer your questions honestly and objectively, putting your interests first.
Here are three of the biggest retirement roadblocks our firm has identified:
Investing as if it were 1975. Our parents didn’t have the investment choices we do. That may sound dizzying, but it’s actually a huge benefit we enjoy. Until the 1990s, it was very difficult to invest in an inexpensive basket of stocks (or bonds) from the United States and around the world. In the past, U.S. investors were limited to big familiar companies.
Today, as a retiree or pre-retiree, you can easily diversify and reduce your market risk by investing in stocks from other developed nations and emerging markets, as well as stocks from small, lesser-known U.S.-based firms. If you only invest in domestic stocks, you will miss other opportunities, as well as be at the mercy of only one asset class. As we saw in the decade between 2000 and 2009, people who only owned large U.S. stocks suffered steep declines in portfolio value. Meanwhile, those who owned the full spectrum of global stocks and bonds emerged from that decade in much better shape.
Not having a clear investment strategy. Do you know what investments you hold? Which stocks and bonds? Do you know why you own each individual security in your account?
Every investment you hold should have a particular job. Not all perform the same way at the same time. Dur-
ing any type of market cycle, your portfolio should be designed to include assets with low correlations, which is just a fancy way of saying, “Some investments zig while others zag.” This smooths your return and mitigates your market risk.
Also, do your investments match your risk tolerance? That’s determined by several factors including your age, your requirements for portfolio withdrawals, your goals for retirement and other needs, and your other sources of income. We meet many people for whom capital preservation should be a main concern, yet they have excessively risky portfolios, often consisting of only large U.S. stocks. That is not an investment plan; it’s just a collection of “stuff.”
Neglecting a retirement income plan. I’ll be very direct: You can’t just wing it.
How much money do you need to maintain a comfortable lifestyle in the coming decades? How will taxes affect your retirement, especially if you are taking Social Security, as well as required withdrawals from qualified accounts? How are you affected by important factors such as sequence-of-returns risk, which occurs when you need
to make withdrawals to cover living expenses, while equity markets are in a downturn? Can you afford to give money to your grown children, or is your generosity hurting your own financial future? Do you have a plan to cover long-term care expenses as you age? What is the legacy you will leave with your money?
These are important questions that may be difficult to answer, but in today’s age of complexities and uncertainties, it’s best to face the facts and learn how to create a secure, comfortable, happy retirement.
Kate Stalter, founder of the independent firm Better Money Decisions, helps people throughout Northern New Mexico plan for retirement. For a free portfolio review and consultation, contact her at 844-507-0961, ext. 702, or kate@bettermoneydecisions.com.