5 Ways to Ruin a Perfectly Good Retirement Plan
A retirement is probably the single largest and most valuable purchase most people will make in their lives, and — fortunately or unfortunately — you generally can’t take out a mortgage or a loan to finance it. This is why those who find themselves well-positioned for comfortable living come the age of retirement are generally the same people who, at the beginning of their working tenure, formed a retirement plan and faithfully executed it.
That is no small task. Nearly half of working-age American households have nothing or next to nothing saved for retirement. As John Bogle, founder of the Vanguard Group, has observed, the three pillars of the American retirement system — Social Security, the defined-benefit plan, and the defined-contribution plan — are all in terrible shape. In a 2012 report, Senator Tom Harkin (D-Iowa) observed that Americans are running a collective retirement deficit of $6.6 trillion.
The purchase that may be the largest and most valuable in the lives of many Americans is out of their reach, and not for the want of trying. Some Americans who form a competent retirement plan still fail to find themselves where they wanted come the age of retirement. Here are a few common pit falls.
1. Being over concentrated
If you’re like most people, you’ve had at least one daydream about how life would be different if you had invested heavily with Google at its IPO or in Whole Foods at the post-crisis trough, when each stock was trading at less than a tenth of its current price. The growth of those stocks has made many people rich — but, unfortunately, probably not you.
This is okay. Few people have the stomach for stock picking and even fewer people should tolerate the risk of investing heavily in any single stock. Instead, most professionals advise that investors diversify and focus on investing in index funds. What you want, as Warren Buffett has argued, is to own a broad slice of the productive, wealth-generating assets that have publicly traded equity. That way, you are making a fairly safe bet on the welfare of the whole system instead of dubious bets on the success of individual parts.
2. Making esoteric investments
There’s nothing like a hunger for yield to trap an investor. When the market is hot, everybody is pushing the next big stock that you should pile cash into (see pitfall No. 1), and when the market is slow, those same people can be found pushing dubious esoteric investments. Common traps include Ponzi schemes, pump-and-dump stocks, or derivatives with opaque components.
Remember — you don’t have to be a genius to invest well, but you do need to be informed. Stay within your circle of competence and make sure you understand what it is you’re getting into.
3. Neglecting your nest egg
Once you’ve got a good thing going, it usually requires some upkeep to keep it going. While it’s important not to micromanage your investments and to remain calm during periods of market panic or tension, it’s also important not to become lazy. Retirement portfolios often need pruning and adjustment so that they remain manageable and current.
Neglect also leaves the door open for common mistakes like ignorance over a change in the fees associated with a retirement account. Fees for most accounts are subject to change, and even small changes in fees can have a large effect on the value of your nest egg over time. Stay up to date and make sure you aren’t paying too much.
4. Being trigger happy
While the first couple of months of retirement are certainly a good time to celebrate the conclusion of your working life, don’t get too wild. Making outsized withdrawals from your retirement accounts early on can hurt you down the road. One of the last things you want is to have to reduce your standard of living later in retirement because you were trigger happy in the early days.
Some people also fall into a trap of trying to time the market in their retirement, making large withdrawals when the market is high and being frugal when the market is low. History has taught us that this process is as much gambling as anything, and that most investors end up worse for the wear.
5. Robbing yourself
Even the best laid retirement plans can be derailed by catastrophe. Medical emergencies, property damage, an auto wreck, or any other number of large, unexpected expenses can threaten to break the bank — if not break it outright.
If possible, however, resist the urge to dip into a retirement savings account in order to pay the bills. You’ll want to seek professional financial advice tailored to your specific needs, but there are usually options to explore before dipping into your retirement savings.