6 Financial Mistakes that Can Spoil Your Retirement

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By Madhupam Krishna

 

Fact: May informed investors fail or struggle to accumulate for their retirement

Why does this happen? If you ask me honestly, a majority of my clients are accumulating for retirement as one of their goals. In fact, this goal has taken prominence over other goals now. But still, investors fail or struggle to fulfill this goal.

The topmost reason for this is that retirement has the longest period of waiting or preparation, and it becomes harder for investors to concentrate for so long. A small mistake can sabotage the plan to such an extent that many people do not recover. For example, failing to reduce equity exposure when age increases because markets make investors greedy for returns. This is why we always emphasise on behavioral authenticity when it comes to planning investments for long term.

And there are more such mistakes that can derail your retirement planning:

You invest without a defined-income plan

One of the biggest mistakes people make is not having a plan. It’s never too early to start saving for retirement, but if you are in your 50s and still have responsibilities, or are finding your income too little in comparison to expenses, there will be a tough time ahead.

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There are strategies and new financial products that can benefit your bottom line. This is all about setting goals, defining your risk tolerances, sticking with the plan and possibly sacrificing the iPhone 7 plus and the exotic vacations. But you need to have a plan first!

 

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You take too much risk to hasten the results

When you are young, you can typically afford to take risks with your investments because time is on your side. This is the accumulation phase. After accumulation, the next phases are preservation and distribution, and this is generally when your financial strategy should become more conservative.

Many investors “throw-in” everything during preservation stage trying to complete the race. This probably works sometimes in Las Vegas casinos, but never in real life.

Many thumb rules exist like “Rule of 100”. It states that you should subtract your age from 100 to determine the approximate percentage of your investible assets that you should have at risk. It sounds simple, but practicing is it is difficult, because selling money making assets to buy conservative assets is not easy on the mind. Therefore we recommend disciplined asset allocation and yearly rebalancing of the portfolio.

Your investments don’t match your needs

Internet and blog sites are full of advice and model portfolios but there is no such thing as a one-size-fits-all strategy for investments. For a strategy to be viable, it needs to be tailor-made for your retirement goals.

Do your homework, seek the advice of a fiduciary or Registered Investment Adviser and seek a second opinion just as you would with a health diagnosis. You and the decisions you make are ultimately responsible for your financial health, but there is nothing wrong with seeking reasoned input from professionals.

You don’t pay attention to illness protection and a long-term care plan

When we suggest Critical Illness cover to an investor in their late 30s, they get shocked. No one wants to talk about illness and the need for long-term care, but it’s better to discuss and plan for it while you are healthy rather than when the situation may be out of your control. The occurrence-age rate of critical illnesses is decreasing at an alarming rate.

Also for long term care, many options exist and continue to emerge, from assisted living to nursing homes or a rehabilitation center. Depending on kids for your health issues is not a strategy. The expense of long-term care should be factored into your retirement plan.

You are not aware of fees, expenses and portfolio maintenance costs

No advisory is really free as fees or brokerages aren’t going to go away, but you certainly need to be aware and keep track of where your money is going. From broker commissions to expense ratios in mutual funds, you need to keep tabs on how much you are spending.

It may mean renegotiating with your adviser, going directly for fees or finding a new one. It may also mean buying a mutual fund with a smaller internal expense ratio. Take a close look at the fine print before hitting “I agree” to terms.

In mutual funds, you can know the expense ratio and brokerage paid to your distributor from the quarterly Consolidated Account Statement. Here is a sample:4

 

You talk to the ‘misinformed’ about your finances

Neighbors’ or coworkers’ advice may be well-intentioned, but it’s likely misguided or possibly self-serving. Share parenting tips and stories about your childhood—but never talk money. It is like inviting the confused to defog the existing confusion.

Conclusion

To succeed at your retirement plan, all you need is one plan, some information, regular checks and a cool head on alert shoulders. To end,

“Your parents are not your emergency fund;

Your children are not your retirement fund.

So, build your own wealth, and retire in style!”

 

Source: thewealthwisher.com | All views, thoughts and opinions expressed belong solely to the author. 

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Madhupam Krishna

Madhupam Krishna

Madhupam Krishna is a SEBI Registered Investment Adviser (RIA) with over 15 years of experience in delivering personal finance advice and services. He founded the fee-only firm The Wealth Wisher, which delivers customised, client-focused investment advice online using the latest technology. View Profile

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