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September 5, 2010 |     |
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Newsletters
Common Retirement Investment Mistakes... and How to Avoid ThemCommon Retirement Investment Mistakes... and How to Avoid Them Our goal is to assist you in achieving a financially secure retirement. In our experience we have come across several common mistakes that people make. We would like to make you aware of them and give advice on how to avoid or fix them. Being Too Conservative It is important to match how you are investing with your time horizon and risk tolerance. Sometimes we see younger people with high allocations toward Stable Value because they want to "play it safe." Investors with 20 plus years until retirement should be heavily invested toward stocks, which tend to generate higher long-term returns. Although stocks are more volatile, a younger person has plenty of time to ride out the ups and downs of the market. A portfolio that is too conservative carries a far greater risk than stock volatility: the risk that you won't have enough money for retirement or you will outlive your assets. In order to provide an income that lasts throughout retirement and keeps pace with inflation we recommend that almost all participants have a portion of their money in stocks. Being Too Aggressive On the other hand, we sometimes see participants that are too aggressive based on their age and time horizon. Once someone is retired and dependent on their portfolio to provide income, we do not recommend being invested too heavily toward stocks. Instead, we advise a balanced mix between stable value and stocks. While the stable value provides stability and downside protection, the stock portion provides long-term growth. Letting Your Account Run on Auto Pilot they are." We recommend that once a year, you spend some time reviewing your asset allocation to see if it still reflects your goals and risk tolerance. Even if you are still comfortable with your overall plan, you may need to rebalance. For instance, let's say that you selected a mix with 40% stable value and 60% stocks. If the stock market has strong growth over a period of time, the proportion invested in stocks will end up higher than your original 60%. The same holds true for different asset classes. For example, international and real estate stocks have grown at impressive runs in recent years, so your portfolio may have more exposure to those areas than you intended. Don't worry about minor divergences in your plan, but when one of your funds strays 5% or more from your target allocation, you should rebalance your mix by restoring your original investment allocations. Trying to Time the Market Some participants switch from one investment to another based on recent past performance, chasing the latest "hot" sector. The trouble is, a hot streak might run for several years but at some point you are likely to encounter a dramatic slow-down. We find that people who do this tend to buy and sell at the wrong times: they buy high and sell low. Instead, we recommend sticking with a long-term diversified investment mix. In doing so, you will always have some of your money invested in the top-performing investment category and you will never have all of your money invested in the worst performing category. Failure to Diversify Some people own many mutual funds throughout their many accounts but are still not diversified. Owning a lot of mutual funds does not mean that you are diversified. For example, if you own several large company stock funds, most likely these funds own several of the same stocks. We recommend adding funds that expose you to other categories such as small company or international stocks. Our model portfolios suggest diversified investment mixes. Paying Too much in Fees Withdrawal charges and investment management fees are two expenses many people are unaware of when they invest money. These fees can vary widely and can have a dramatic impact on how long your retirement funds will last. Variable annuity IRA's, for example, are heavily sold as an option for pension and 401(k) assets. Many people do not realize that these accounts generally charge annual expenses in excess of 2% or 3%, in addition to withdrawal charges of up to 9% for up to 9 years. Impact Of Expenses On A Retirement Account
(1) 0.92% Conservative Growth Allocation, (2) 2.0% average according to Morningstar, (3) 2.8% average of four leading annuities with living benefit rider. Illustration assumes 8% return for all plans. Taking Excessive Withdrawals and Loans Many retirees depend on their retirement accounts to provide income throughout their entire retirement. We see some people who withdraw from their accounts at rates which likely will put them at risk of depleting their retirement assets. As part of developing a retirement plan, we recommend putting together a budget and an estimate of how much annual income you will need your account to generate. We can then do projections on the impact of your withdrawals on your retirement assets. Additionally, taking loans from retirement funds can also be dangerous as it is often a sign of overspending and faulty budgeting. Any money taken out misses out on investment gains, and ultimately affects what is accumulated for retirement. We recommend that loans be used only when no other options are available. Not Taking Full Advantage of Company Retirement Plans Few people would turn down a pay raise or a tax cut, but some people are doing just that by not contributing enough or at all to their 401(k) plan. Most employers match 50%-100% of your contributions. Where else can you get that kind of return on your money? We recommend that people contribute at least enough to receive the maximum company match. Holding Too Much Company Stock When looking at participants' overall financial situations, we sometimes see people owning excessive amounts of their company stock. It's easy to overload on these shares without meaning to, particularly if your 401(k) match is in company stock or if you receive stock options. People tend to keep company stock because they know the firm and are invested in it in other ways. Recent events in which employees lost their entire retirement savings are reminders of how dangerous it is to bank your retirement on a single company. Financial professionals generally recommend having no more than 10% of your portfolio in your company stock. Give yourself a target and a timetable to start diversifying it into other investment options. If you are still working, consult your 401(k) administrator to ask about your plan's policy on company match diversification. The first step toward fixing mistakes in your retirement plan may be to seek professional advice. We at Scarborough are here to help so please feel free to call to discuss your situation. (Published: 8/16/2007) Back to Index |
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