Retirement Planning: Avoid Mistakes

August 27th, 2011

One bad decision can ruin a lifetime of good ones

Actions have consequences, and this is more than true in the final third of life. If you are at or near retirement, the decisions you’re about to make will have consequences for decades to come. Unfortunately, it only takes one bad decision to ruin a lifetime of good ones. So what are the biggest mistakes to avoid?

Link your retirement to your bank account

If asked when you’ll retire, your answer should be a dollar amount, not a year. Retirement is about independence, not simply age, and money is critical to independence. You need to know exactly how much you need to save to fund the retirement you want.

Managing your risk

Risk is a necessary companion to investing. When you’re in your 20s and 30s, you can afford to take greater risks in hopes of receiving greater returns. If you lose money, you have decades to recover. Not so as you approach retirement. You can’t afford to operate at the same risk level. As you age, you need to progressively shift out of potentially volatile investments. During retirement, large losses in your portfolio are extinction-level events. The bigger the loss, the worse the recovery. If markets have taught us anything during the last 10 years, it’s that you need a plan to manage your risks and avoid large losses.

Senior risks

The same is true for a whole host of new risks that come with growing older. A serious medical condition, the death of a spouse, getting laid off, entering a long-term care facility or getting divorced could all significantly impact your emotional and financial well-being. The goal is to consistently identify and manage your risks in order to increase your odds of a rewarding retirement.

Minimize debt

An increasing number of people are entering retirement age with no pension, inadequate savings, a big mortgage, an average of about six credit cards, and debt on one or more cars. Work is not a choice at that point any more than it’s a choice for a 30-year-old with all the same obligations and a growing family to feed. Debt adds risk and reduces cash flow. Your primary goal should be to retire debt-free and have your income at your disposal. If you retire with debt, you will spend a long period paying for the purchases of yesteryear instead of using your income to live the life you’ve dreamed of. Get professional advice. Preparing for retirement is all about accumulation, saving and investment performance are your primary concerns. But in retirement, your primary goal becomes much more complex: to continue to grow the pie while simultaneously eating it. Going without a competent adviser at this stage could be a big mistake.

Distribution strategy

When you retire, your portfolio takes over the job that the payroll department handled during your working years, namely to send you a paycheck every month. If you retire when you’re 65 and live until you’re 85, it needs to cut you 240 monthly checks. There are a host of variables that will affect its ability to do that, such as the distribution rate you choose, investment returns, inflation, how long you live, and good old-fashioned luck. Some things you can control and others you can’t, but having a well-conceived, sustainable distribution strategy will help ensure that your money lasts as long as you do.

This entry was posted on Saturday, August 27th, 2011 at 5:00 am and is filed under Economy, Employment, Finance, Money, Retirement. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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