Hidden Fees, Unintentional Wealth Transfers and Other Lurking Retirement Hazards

As much as everyone looks forward to retirement, people aren’t always as careful as they should be about planning for those post-career years. The result: They and their portfolios trip over hazards that could have been avoided.

For example:

• A financial fee they didn’t even know existed slowly eats away at their investment gains.
• Bad luck and a bad market in the first years of retirement put a substantial dent in their savings.
• A slew of metaphorical coins slip through a hole in their portfolio “pocket.”

It doesn’t have to be that way. Let’s take a look at just three things you can do to help reduce the risks lurking out there and improve the odds of a joy-filled, rather than anxiety-filled, retirement.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Creating the right asset mix

Many people make a big mistake with how they invest their savings. They don’t adjust their asset mix to ease up on risk as they near retirement. Then the market jigs when they need it to jag and potential disaster looms.

Here’s an analogy I like to use: Saving for retirement is like sailing on a cruise ship from Port Canaveral to the Bahamas. Your asset mix is determined by where you are on your journey. Are you just starting out? Halfway there? Or about to dock? People often stay way too aggressive with their investments at the voyage’s end, and they sail full speed into port, crashing into the harbor wall.

Something called the sequence of returns risk also comes into play here. This risk emerges when you reach retirement and begin to withdraw money from your retirement accounts for living expenses. If the market performs poorly in your first few years of retirement, it can be extremely difficult to recover. Your balance is dropping both because of the bad market and because you are withdrawing money. But if the market is strong in the early years of your retirement, your portfolio can build strength, allowing you to better weather bear-market years later on.

Because of this sequence of returns risk, two investors could have drastically different results from their investments depending on when they retired. Of course, you can’t predict how the market will do next week, much less the year you plan to retire.

Whether your retirement starts off in a good market or bad one comes down to luck, and the last thing you want to do is leave your retirement’s stability to luck. So, you need to develop strategies to reduce the sequence of returns risk.

One strategy I recommend that people consider is to divide your asset mix and invest each portion of the money based on how soon you need it.

• For “now” money that you expect to need in the next year or two, the investment risk should be low.
• For money you will use three to five years from now, the risk should be moderately conservative.
• For money you will use six to 10 years from now, the risk should be moderate to aggressive, and for money you don’t expect to touch for 10 years or more, the risk should be aggressive.

This approach helps lessen the devastation a market downturn could cause to your portfolio. Everyone’s situation is unique,

Cutting the costs on your investments

People often pay fees on their investments even without realizing it. The financial world is full of such fees and, frankly, isn’t always transparent about the costs to you the investor. Obviously, people who offer you advice or manage your accounts need to be paid, but it’s important for you to know how much you are paying, what you are getting for your money, and whether there are other options for you.

At my firm, we use Orion software to analyze fees for clients, so they know what kind of fees they are paying and how much they all add up to. We have noticed that, although everyone who comes to us has a portfolio, the vast majority don’t have a financial plan. One thing your money should be paying for is a detailed plan, because a plan not only helps you make wiser investment decisions, it may also help you reduce costs.

Avoiding an unplanned wealth transfer

When I speak of wealth transfer in this context, I’m not referring to an intentional decision to leave money or other assets to your children. Many people are transferring wealth unknowingly – and that wealth is not going where they want it to go. In the Bible there is a reference to a man who stores his wages in a bag with holes, allowing the coins to drop out, lost forever.

Perhaps your coins are slipping away, too, because you have your own holes. Maybe it’s because you pay unnecessary taxes, transferring a portion of your wealth to Uncle Sam. Maybe you aren’t getting the most out of your employer’s 401(k) plan.

One good example involves paying cash for a car. While many people like to do this and consider it wise to avoid financing, this approach does have a downside. You lose out on all the compound interest you could accumulate over the years by investing that money instead. People save their money, then drain their account to buy a car. They then must rebuild that savings and, once it gets back to a substantial sum, it’s time to buy a car again and they drain their account all over again. Repeat that scenario several times over the years and you lose out on a lot of compounding.

If you can figure out where you are transferring wealth out of your life, and find ways to stop it from happening, you will be able to recapture wealth that would have been lost to you forever.

Whether it’s bad retirement timing, a hidden fee or a disappearing coin, you should do all you can to make the most out of your retirement savings. If you don’t feel confident going it alone, seek the help of a financial professional, preferably a CERTIFIED FINANCIAL PLANNER™ professional. You should also consider an Investment Adviser Representative.

You don’t have to just watch your savings dwindle as you encounter any or all of these retirement hazards. The right plan can help you feel more secure and keep your retirement on track.

Ronnie Blair contributed to this article.