The Six Sins of Retirement Planning
It’s probably not too difficult to recall a couple of missteps you've made in the past with
your finances. However, instead of worrying about them, you should be more concerned about
identifying the missteps that you don't know you’re making. Below are six common and costly
errors that people can make with their finances. They are also the kinds of missteps that can be
hard to identify unless you know what they look like. It can be relatively easy to make changes,
once identified, that will help clear up any concerns and get you on track to meeting your
financial goals, such as a comfortable retirement.
Misstep 1: Buying the Most Popular Investments
When a particular mutual fund* or other investment is setting the world on fire, it's
tempting to invest heavily in it. But such popularity may cause an investment to rise to
unsustainably high levels — and the risk of a sharp decline grows when that occurs. Thus,
investors who pile into today's high–flying funds or new products might end up with losses
and/or regrets tomorrow.
Misstep 2: Making Short -Term Investment Decisions
Some investors are tempted to make short–term bets on particular investments, based on
today's economic news. But the factors that drive investment yields can be complex, and play
out over long cycles. It is much simpler — and usually safer — to base your decisions on a
longer–term outlook for most investments. Interest rates, although important, should not be
the sole factor in choosing an investment. If you’re working with a competent financial
services professional, he or she can have a “strategy” for the big picture that is
tailored to help meet your goals based on many variable factors. If you’re in your 50’s or
60’s, you have a lot of years to plan for retirement income, savings and so on. Since no one
can look into a crystal ball, working with an experienced financial professional can be
extremely helpful and comforting since they have probably been working with many clients
through many cycles and events. The end result is that they may have credible indicators to
help you meet your goals.
Misstep 3: Taking Too Much Risk
Mutual funds* and other investments* that offer the most potential for long–term growth
often carry considerable risk. There's nothing wrong with taking on that risk, as long as
you are willing to ride out significant fluctuations with the value of your investments. All
too often, however, investors attracted by the chance for significant gains invest heavily
in funds or other assets without understanding the risks they carry. If you’re in retirement
or getting within five years of retiring, you many want to seriously consider reducing your
risk tolerance. Naturally, most people want to get as much growth on their money as
possible. However, serious focus needs to be placed on how much you are willing to lose in
pursuit of that gain. Typically, retirees and pre-retirees like to have a high percentage of
their investable assets in fixed income or lower risk vehicles, because these individuals
may not be able to afford a downward trend or cycle if they’re relying heavily on their
dollars to provide them with an income. A qualified financial services professional can help
you look further into your variable investments to see the quality of the funds, money
managers*, etc. It never hurts to know more about your money and what it’s doing or might do
in the future.
Misstep 4: Ignoring Tax Consequences**
Taxes can drastically affect your investment returns. If you are in a tax bracket that pays
roughly 25 percent to the IRS, one out of every four dollars in interest you earn is
taxable. Those that should be most concerned about paying tax on money that they are not
using are those that are still working, have a combined annual income above average, and
those who dislike the idea of giving money away that they would rather keep for themselves.
Some investors pass up the opportunity to keep more of their money in their own pocket
because they don’t understand how some investments are taxed or they don’t understand the
importance of tax-deferred or tax-free vehicles versus investing in other vehicles that
carry no tax benefits.
Misstep 5: Investing Without a Strategy
If you consider your investment options one by one, it's easy to find some that you like
more than others. However, if you simply pick your favorites or ones you are used to, you
may end up with a portfolio that may not meet your needs. Instead, you should create a
retirement strategy that is based on your long–term goals and your risk tolerance, choosing
a mix of vehicles that can work together to address those needs. When working with a
financial services professional, it should be of the utmost importance to describe your
situation, your goals and the things you like and don’t like related to finances. Based off
your desires, the professional can present you with options that can help you accomplish
your goals. It’s a similar situation when you see a doctor if you aren’t feeling well. You
describe what you’re experiencing and what you are looking for as an end result. The doctor
typically may prescribe treatment or medications that you’ve never heard of. Once
comfortable with the risks and benefits, in many instances, the treatment or prescription
may be the key to accomplishing the goal.
Misstep 6: Worrying Too Much
After you have a strategy in place, you and your financial services professional will
review periodically and possibly make adjustments as needed. It is so important to have
someone looking out for you especially when we’re talking about your finances. In the
meantime, go back to enjoying your time with family and friends. Your future is important —
but perhaps the biggest mistake of all is to worry about it so much that you miss out on the
satisfactions of the present.
*Securities offered through NYLIFE Securities LLC
**
Neither Steele Financial Solutions, its staff nor New York Life
Ins. Co. or its agents or affiliates provides tax, legal, or accounting advice.
Please consult your own tax, legal, or accounting professional before making any
decisions.
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