Financial planning and investing isn’t rocket science. It’s first and foremost about discipline. You set some goals, determine what needs to be done to achieve those objectives and then do those things consistently year in, and year out.
Oh — and avoid dumb mistakes. That’s pretty important, too.
7 Common Retirement Mistakes
In my book, You Can Retire Sooner Than You Think, I discuss some common psychological miscues to avoid as you chart and pursue your financial future.
Underestimating How Much You Need To Save
This dangerous mistake is incredibly common. We either don’t put serious effort into the calculation or factor in too many overly optimistic assumptions when setting targets for funding retirement.
You need to have a retirement savings goal. Set aside some time ASAP and put real thought into that number. Start by discussing how you envision your retirement. Will you travel? Buy a beach house? Fund a charitable effort? Stay home reading and binge-watching Netflix? Will anyone in your family need financial help?
Think, too, about the really tough questions. Statistically, we are living longer. You could be retired longer than you worked in your life. That possibility must be factored into your savings goal.
Consider health issues as well. How might they impact your financial situation? I recommend using a retirement calculator like this one which can help you work through all these questions.
(Full disclosure: Wes Moss is the Chief Investment Strategist at Capital Investment Advisors.)
Chasing a Fast Buck
Asset bubbles are an alluring and deadly phenomenon. Soaring tech stocks, condos or precious metals can create siren songs that lure even smart investors off their well-thought-out paths of diversified investment. After all, when the crowd starts chasing something and everybody you know is talking about how they cashed in, you don’t want to be left behind, do you? Then the bubble bursts, taking everyone down in one big gulp.
When the crowd (and media) start going nuts over some investment vehicle, take a breath and keep your eyes on the prize. You are (or should be) playing the long game. Sprinting after a quick profit is an energy-wasting distraction that likely won’t improve your performance.
Glossing Over Fees
Fees can be a real drag on your investment returns. As you build and adjust your portfolio, ask questions and read the fine print to make sure you are fully aware of all possible fees. These can include marketing fees, surrender penalties, operating cost fees, brokerage trading commissions and more.
In our pursuit of returns, we sometimes fail to consider other important factors such as liquidity. While you should be invested for the long term, there may come a time when you need to tap your invested savings to meet an urgent need. Some assets, including annuities, can lock up your money for 5-15 years — either because there is no market to resell the investment or because big penalties are imposed if you sell.
This is the phenomenon of always seeing something greener on the other side of the investment fence: “My portfolio was up 6% this year, but Asian agriculture stocks were up 12%. Maybe I should move a chunk of my money into that area.”
Such thinking will exhaust you and lead to constant disappointment. Why? Because it is often based solely on the past performance of an asset. We fail to examine the alluring asset’s fundamentals to see whether that awesome return is typical or possible to replicate going forward.
Again, when tempted by the fruit of another, remember that you have a well-crafted plan in place that should not be ditched on a whim. If you think this juicy new asset category might advance your strategy, do your homework before adding it to your portfolio.
It’s easy to build an emotional attachment to a stock, either because we’ve held it a long time, or because we have a deep understanding of it — perhaps because we work for the company. But a stock isn’t necessarily a safe or smart investment just because we’re familiar with it. This is another example of emotion derailing sound investment strategy.
I’m not saying you should stay in an unhappy relationship for financial reasons, but ending a marriage is incredibly costly. Too many people simply rationalize this reality away in their haste to escape a bad relationship. A divorce, in essence, cuts your net worth in half. The later in life this happens, the tougher it is to recover. There’s a reason most of the high-net-worth individuals profiled in The Millionaire Next Door book have never been divorced. What’s more, from an emotional standpoint, based on research for my book, the happiest retirees are married.
For more on the most common investment pitfalls, and how to avoid them, check out my book, “You Can Retire Sooner Than You Think.”