If you’re new to retirement, you can expect to make some mistakes. It’s all unexplored territory for you, after all, and you’ll have to figure out some things as you go.
But you can learn a lot from the experiences of those who’ve gone before you—and that’s especially important when it comes to your finances. Too many stumbles and surprises could take a toll on your hard-earned nest egg.
Here are some common errors to avoid:
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1. Not guarding against market decline.
We’ve seen tremendous growth in the stock market for almost a decade—the second-longest bull run in U.S. history. Long enough that many people seem to have forgotten what happened to their savings and/or net worth during the recession of 2008. They’ve let their guards down—and that inevitably leads to taking too much risk. All bull markets end, often dramatically. If you’re near or in retirement when a correction occurs, it can be devastating. We will see another market correction; we just don’t know when. It’s crucial to put your emotions aside—euphoria, greed, overconfidence—and adjust your risk to match up to where you are in life.
2. Thinking of bonds as a safe investment.
Although bonds are considered less volatile than stocks, they have their downsides—particularly in an environment of rising interest rates. Interest rates and bond prices typically have an inverse relationship: When one goes up, the other goes down. The Fed raised rates three times in 2017, and it is forecasting three more hikes this year. If that happens, many investors will see some losses in their bond portfolios. It’s one more reason to diversify. Some alternatives for safer money strategies would be considering certificates of deposits by banks. With interest rates rising, CDs are becoming slightly more attractive over the last 12 months. Also, there are some very attractive fixed index annuities that could also be a great alternative to bonds.
3. Assuming that a particular financial tool is always good or always bad.
It would be nice if everything were black and white, and we could say Investment A is great and Investment B is terrible. But in the real world, one could be good for some and bad for others. Annuities, for example, are often either lauded as the perfect retirement solution or condemned as the worst financial product you could purchase. In actuality, it depends on the type of annuity you’re looking at and how it fits in your overall financial plan. This is true for most products and strategies: There is no one-size-fits-all.
4. Not protecting against long-term care costs.
According to the Genworth 2017 Cost of Care Survey, the average American underestimates the cost of in-home long-term care (the most popular long-term option) by almost 50%. Even those aware of the costs often pass on purchasing long-term care insurance—either because it’s expensive or hard to get, or because they don’t like the idea that if they don’t use it, they lose it and the insurance company wins. But there are many alternative options to assist with the costs associated with long-term care that retirees may want to explore. These benefits are typically added through a rider, which may have an additional cost. There are some that offer protection of principal from market losses, but also have the potential to provide higher interest earnings. These insurance products—and their benefits and features—vary from state to state but are definitely worth checking out if you want to help protect your savings.
5. Not having an income plan.
Regardless of the size of your nest egg, once you retire and your paychecks stop, there is almost always some anxiety about running out of money or having to make lifestyle adjustments. By having an income plan, with proper Social Security maximization strategies, you and your spouse can get a better handle on how much you’ll need and where it will come from. By mapping out the next 20, 30 or 40 years, you can clearly see what the future may look like as retirees, and if there is a shortfall that will require you to make changes or keep working. Or you may learn that you’re right on track, and you’re more financially stable than you thought.
The path to and through retirement can be complicated, and like any first-time journey, it’s good to have a guide. Getting advice from a friend or family member can help with some issues, but when it comes to your finances, you may wish to work with a financial adviser who is up-to-date on the latest products and strategies. Sitting down with an independent financial adviser who is experienced in working with retirees and pre-retirees, and who puts a priority on income planning—could help you get around many of the pitfalls and roadblocks along the way.
Kim Franke-Folstad contributed to this article.
Investing involves risk, including the potential loss of principal. Any references to protection benefits generally refer to 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.
Investment advisory services offered through Kanani Advisory Group, a Registered Investment Advisor. Securities offered through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC. MAS and Kanani Advisory Group are not affiliated companies. CA License #0B34918
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