Investing is a challenge at any age, but as you near and reach retirement, it becomes especially important to help avoid making mistakes.
When you’re younger, you have more time to recover from the loss you suffer on a bad investment or when the market sputters. However, when you are older and your investments are providing your income, it’s important to help preserve your nest egg.
That mission may seem overwhelming at times — but there are things you can do to protect your money and help make it last. Here are three common pitfalls to look out for as you move into retirement.
1. Paying too much in fees.
Why is it important to stay vigilant about fees? Recently, while reviewing an investment portfolio with a potential client, we discovered he was paying 2.32% in fees on a mutual fund he’d invested in — not the 0.68% he has assumed he was being charged, based on his understanding of the operating expense rates. He didn’t dig into the prospectus to uncover other fees, such as trading costs and 12-b1 fees. Investors need to make sure they are doing their due diligence to truly understand all of the potential fees.
In my opinion, another factor to be cautious about is when advisers and mutual fund managers justify their high fees by promising market-beating results. High fees do not always translate to better investment performance. If you aren’t paying close attention, these fees have the potential to quickly dissolve any profit you may make from the investment.
Fees are typically based on a percentage of your assets. As your account balance increases you are paying an ever growing dollar figure of fees. An investor with a $350,000 portfolio could easily be paying $3,500 to $7,000 or more per year in management fees. As money is deducted to cover these fees, there is less capital left in the account to compound and grow. That is why it’s important to understand what you have in your portfolio, how much you’re paying in fees and what those fees are for.
An analogy that everyone can relate to is a trip to the grocery store. Most shoppers have a pretty good idea of how much the items in their cart cost before they hit the checkout line. Imagine at the time of checkout your groceries wind up costing 100% more than what you anticipated. This could be the case for investors who do not understand the fees they are being charged.
There are tools available for you to use in reviewing your portfolio and the fees you may be paying. One example is a prospectus, a legal document that provides in-depth details about your investment that can be used to help make more informed decisions.
If you can’t find what you are looking for, ask your financial adviser about the fees you could be paying to buy, sell or hold each of your investments. Also, know which fees will and will not be listed on your statements and ways you can track the ones that are not listed. You can also have an adviser review this with you.
2. Taking unnecessary risk.
For years, investors have had it instilled into their minds that a solid portfolio is composed of 60% stocks (for higher returns) and 40% bonds (for stable income). For the most part, this formula made sense.
However, times have changed. A combination of a record-setting bull market coupled with historically low interest rates has made this previous investment approach far less prudent these days. Bonds — which are generally perceived as safe, reliable investments — are at risk due to rising interest rates, which can cause future bond prices to fall. Stock market valuation already exceeding a 10-year bull market could potentially be a concern if you are counting on your portfolio for income in the near future.
There is nothing wrong with stocks, bonds or a portfolio that is diverse in both. Balance is key — and that means looking into other asset classes, such as real estate, commodities, annuities, futures, etc.
In retirement, it’s particularly important to lower the level of risk in your portfolio. Yet, we find many investors have no idea how their portfolio equates to their personal risk tolerance — the amount of risk they can sustain taking while still progressing toward their financial goals.
Not long ago, I had a conversation with another prospective client who described himself as an “ultra-conservative” investor. When we tested his risk tolerance, he scored a 27 on a scale of 100, (with 100 being the most capable of handling risk). Then we tested his portfolio, and it came in at 78. His portfolio was not in line at all with his risk tolerance. This tends to be a common occurrence.
That does not mean you should be stashing your nest egg under the mattress or even in a savings account. But you may want to do some thoughtful strategizing to help ensure that too large of a portion of your portfolio is not at risk in retirement. Remember, this is money that you may tap into in order to supplement your retirement income. You need it to last.
3. Taking too much too fast.
It has been said recently that running out of money during retirement is people’s greatest fear, surpassing losing your job and even public speaking, which has now been bumped down to the No. 3 spot!
There are good reasons to be concerned. People are living longer, so the money they save may have to last 20, 30 or maybe even 40 years. Also, fewer Americans are offered pensions anymore, so the pressure is on more retirees to figure out a savings withdrawal strategy that will pay their bills every month.
Most people could be forced to depend on their investment savings for more of their retirement income perhaps longer than they expected. That is why they are being advised to withdraw less each year.
You may have heard the rule of thumb is to take 4% from your investment savings in the first year of retirement and then add 1% to 2% in order to account for inflation yearly. In doing so, your portfolio could possibly sustain you for approximately 30 years. That calculation has been the source of much debate in recent years. A safer suggestion is a 3% withdrawal rate, or even 2%.
To put that into perspective, if you had a $1 million nest egg, you would take $30,000 (3%) or $20,000 (2%) in retirement income each year to supplement your Social Security benefit and any other reliable income you receive.
If that wouldn’t be enough to provide the retirement lifestyle you envision, it is time for you to take control. I believe this leads us to the biggest pitfall of all: not having a comprehensive plan in place as you transition into retirement.
If you are near or already at your goal retirement age, take the time to look at what assets you have and prepare your investments to provide for your future income needs. I believe it prudent and in your best interest to review your investments along with any additional assets and Social Security on a yearly basis and make sound informed decisions based on the lifestyle you want to enjoy during this time in your life.
Doing the “legwork” up front can very well lead to your being able to comfortably and confidently put your feet up later in life. And isn’t that what we all strive for?
Kim Franke-Folstad contributed to this article.
Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Paladin Retirement Advisors are not affiliated companies. Investing involves risk, including the potential loss of principal. Any references to protection benefits, safety, security, lifetime income, etc. generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. #242936
Jeff Beyer is the owner and CEO of Paladin Retirement Advisors (www.retirepaladin.com). His focus is on developing financial plans and retirement strategies that satisfy clients' life and investment needs. Jeff has passed the Series 6, 63 and 65 securities exams and is an Investment Adviser Representative. He also holds life, health and long-term care insurance licenses in Pennsylvania and New Jersey.
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