7 Bad Habits That Can Ruin Your Retirement
Reprinted courtesy of MarketWatch.com.
To read the original article click here.
Some soon-to-be-retired baby boomers are great savers, and their “golden years” of retirement will be much more golden than those of their contemporaries who are very good at spending and borrowing yet do a lousy job of saving money.
But being a great saver isn’t enough.
My longtime friend Henry (Bud) Hebeler recently wrote about the grim financial prospects awaiting millions of people who are still working. Bud listed three major forces that will reduce most people’s retirement prosperity 20 years from now: our growing national debt, the aging of our population and the decline of our savings rate.
A man with impeccable credentials for looking at big-picture economic trends, Bud recalled our nation’s 20% national savings rate during World War II and our 9% savings rate for four decades after the war. Alas, that rate dropped to about 1% in 2005, and last year it was still under 4%.
To overcome this cumulative shortfall, we as a nation would have to save 20% for the next 20 years, he wrote. Yet that is certainly not likely to happen in a society that’s economically dependent on and psychologically addicted to all the latest improvements in everything from medical procedures to smartphones.
Some people who are still working and accumulating assets will build better retirements for themselves by saving aggressively and fully using tax breaks such as 401(k) plans and IRAs.
But even if you save 20% of your earnings, that won’t be enough if you are a careless investor.
Here are seven destructive (or at least counterproductive) habits and decisions that can ruin your retirement dreams.
One: Speculating, even with a small part of your portfolio
Very few people leave Las Vegas with more money than when they arrived. At least (if they are fully rational) they can regard their losses as expenses of entertainment. But believe me, it’s neither fun nor entertaining to have to scrimp in retirement because you made foolish investments when you were working.
Two: Taking too little risk
This may seem strange coming from someone who preaches risk control at every opportunity. But especially after the market meltdown of 2008, too many people think they can “be safe” with their money in cash and bond funds. Inflation is a silent but deadly enemy of retirement, and the only reliable way to fight it is to invest part of your portfolio in low-cost, diversified stock funds.
Three: Owning too much company stock
Your employer may incentivize you to load up your 401(k) plan with company stock, but it’s a poor idea. Company stock is the enemy of diversification. According to the experts I follow, you’d have to make four or more times the return of the Standard & Poor’s 500 Index SPX +1.04% to justify the risk of putting your whole savings in just one stock.
Four: Ignoring recurring fund expenses and the internal trading costs of portfolio turnover
These often-invisible expenses can eat up half your retirement savings, even if they “only” cut your return by a couple of percentage points. In my 2012 book, “First-Time Investor: Grow and Protect Your Money,” I show that if over a lifetime you earn 8% instead of 6%, you will have 2.6 times as much money to spend and leave to your heirs. If you do that by cutting your costs, you aren’t taking any additional risk.
Five: Following the ‘I-can’t-take-it-anymore’ market-timing strategy
When your buying and selling decisions are driven by emotions, you’ll sell at the wrong time (you can’t stand to lose any more money, after you have already lost a lot) and buy at the wrong time (you can’t stand to stay on the sidelines any more when everybody else seems to be making easy money). To get the positive long-term returns from your investments, you have to stay in the game even when things look bleak.
Six: Investing in familiar, ‘safe’ asset classes
Investing in so-called “safe” asset classes like large-cap growth stocks while passing up the opportunity to invest in a handful of asset classes that, when used together, are likely to increase your return and reduce your risk. More than 50 years of evidence indicates that adding small-cap stocks , value stocks, international stocks and real estate stocks, can boost your equity returns by two percentage points — and sometimes more.
Seven: Following the siren song of Wall Street in order to beat the market
Highly motivated salespeople will go to great lengths to persuade you to shoot for amazing returns that they suggest will leave “ordinary investors” far behind. If you fall for their sales pitches, you’re likely to own investments that saddle you with high expenses, high commissions, low returns and (worst of all) a lack of liquidity that can tie up your money forever.
Fortunately, you don’t have to fall into these traps. If you save as much as you can and always do your best to avoid these seven pitfalls, you can make your golden years truly more golden.
Richard Buck contributed to this article.