7/21/2014 2:45 PM ET|
The 7 deadly sins of retirement
Avoid these mistakes and have a retirement that would make Dante proud.
Dante's seven deadly sins have long been deemed to be the main avenues to eternal damnation. Any aspect of life, then, is fodder for examination using the seven sins as benchmarks -- including retirement planning.
Seem like a stretch? Not really. Human foibles are apparent in all areas of personal finance -- they can throw you off course during your earning years, and they can do lasting damage as you approach retirement. Pride, envy, wrath, greed, sloth, gluttony and lust all lead to behaviors that can set you back from achieving important goals.
If you have a nagging feeling that you could be doing a better job of retirement planning, check out these seven common offenses and learn how to get yourself back on track.
You don't admit you need help when retirement planning becomes more complicated than you originally thought.
Men are apt to be worse than women in this regard, experts say.
"All too often, men won't admit to others where they lost money," says Timothy F. McCarthy, former president of Charles Schwab and Co. and the Fidelity Investment Advisor Group. "Women, however, are more likely to discuss their investment failures as well as successes. They don't define themselves by how much investment acumen they have."
The clear danger to going it alone: Emotions that arise may easily lead to irrational decisions. A professional such as a Certified Financial Planner can help with your individual retirement plan.
"Someone not doing this full time will be less likely to spot trouble," says Larry Luxenberg, managing partner and chief investment officer of Lexington Avenue Capital Management in New City, N.Y. Good examples of trouble spots, he says, are asset allocation and portfolio diversification.
"When an amateur gets these wrong," says Luxenberg, "it could spell the difference between a comfortable retirement and a much delayed one -- or worse."
So swallow your pride when it comes to building a long-term portfolio, and get help if you know deep inside that you need it.
Yes, keeping up with the Joneses is a cliche, but at its core is envy, which can unwittingly thwart your retirement planning.
"Driving new cars, acquiring a home in a fashionable neighborhood, sending the kids to private school to keep up with their friends, are surefire ways to minimize your retirement saving potential," says Mark Petersen, CPA, CFP and vice president of affluent wealth planning for Carson Wealth in Omaha, Neb. "They are all nonincome producing assets."
The human tendency to compete may transfer to the investing arena, which could lead to disaster. "The problem is that focusing just on winning on an annual basis forces us to make big and specific market bets," says McCarthy, author of "The Safe Investor: How to Make Your Money Grow in a Volatile Global Economy."
"We know that never works consistently."
Rather, the better course, he says, is to forget whom you're envious of in the short term, and invest in broad categories of asset classes to minimize your risk.
"What we should care about is to make sure to have enough money
"You can take this job and shove it," is a common refrain among the work-weary, particularly those who have clocked in for many years. But don't let anger cloud your judgment in leaving a job. Often, irrational decisions are made in the heat of anger. Leaving a job without sufficient planning could wreck retirement savings.
"You may be living off that savings if your job search takes longer than expected, and voluntarily leaving employment may disqualify you for receiving unemployment benefits," says Petersen.
In addition, paying for COBRA insurance is generally more expensive than an employer group plan insurance premium, which is often paid by an employer.
Randy Warren, chief investment officer of Warren Financial in Exton, Pa., agrees, adding if you have to leave, it's best to leave amicably. You'll need a referral.
"Burning that bridge is surely not a wise approach, especially when your retirement savings are on the line," he says.
Terry Dunne, vice president of the Rollover Solutions Group at Millennium Trust Co. in Oak Brook, Ill., sums it up: "The most noted outcome of anger is cost."
Greed is one of the most deadly sins. Most people want more of something, and money is often at the top of the list.
"Greed is that particular slice of human nature on steroids," says Dunne.
"It's unquenchable," he says. "Furthermore, it's the opposite of equanimity, which is the name of the game in personal financial planning."
For example, it's not unusual for investors to frequently chase returns and participate in fads to their detriment.
"That's a form of greed," says Luxenberg. "Once a stock or new investment vehicle starts moving, it's tempting to jump on board. Your friends and family are all making great money at it, why not you?"
Unfortunately, he says, most people wait until the trend is well-established before they plunge in. "Bitcoin is only the latest example," says Luxenberg. "Most investors buy the right things but do it at the wrong time, and that's enough to sink a portfolio.
"Popularity gives comfort, but the more uncomfortable investment decisions often pay the best," he adds.
Sloth represents laziness. And laziness is not a good trait in investing.
Yet procrastination is all too common in retirement planning just as it is in other aspects of life, according to retirement specialists. There's always tomorrow.
"Most investors don't spend enough time on their retirement planning and don't review their options sufficiently enough," says Luxenberg. "They may worry about money, but too often don't take constructive steps."
You have to do your homework in advance, know your options and determine which are best, he says. "When to draw from retirement accounts, how to invest, what investment vehicles to use -- all have tax implications, for example," says Luxenberg. "Proper planning can make huge differences in taxes and returns."
Once you have a plan in place, it's important to stay on top of your investments through your retirement years.
"Stay away from the sin of sloth by continually monitoring your investments," says McCarthy. But that doesn't mean you should increase trading activity by moving quickly from one investment to another.
"Make your adjustments slowly, deliberately, and over time you will keep your risk of investing at a minimum," he says.
Gluttony is a cousin to greed. And being overly greedy in the market tends to lead to investment failures instead of successes.
Rather, it's much better to be goal-oriented, say advisers. "People who have goals often strive to reach them," says Warren. "Just wanting to make more money is not really a goal. That's gluttony."
"If you are goal-oriented, it will affect your investing strategy," he says. "So you may not need to shoot for the moon in terms of investment returns."
Don't let gluttony distract you from those goals.
"If that expensive new car or trip to Europe means bypassing your retirement account contributions or even cashing in your 401k or IRA early, it's a sure way to retirement ruin," says Andrew Rafal, partner and co-founder of Strategy Financial Group in Phoenix.
"Be sure to stick to your savings goals and budget for the retirement years," he says.
Make sure your retirement planning goals are realistic. Don't lust for what you can't have or can't achieve since you might put too much at risk in the effort to get it.
Say you currently have $1 million in your 401k. If you tell your financial planner you want $5 million in three years so you can retire, "you're lusting after an unrealistic objective," says Warren.
"Investing is not wishing for something you don't have," he says. "Realistically, retirement planning would be achieving realistic goals."
Rafal agrees: "Lusting after a specific number could mean overexposing yourself to risk and jeopardizing your entire retirement future in trying to achieve that specific number," he says. "Instead, create a retirement plan based on your income needs for the golden years."
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We have never tried to keep up with the Joneses.
We try to drag them down to our level.
Say you currently have $1 million in your 401k........
I retire Aug 29th, No debt. 120K in savings $700K in 401K. My wife and I are frugal. enjoy house cleaning, gardening, drawing, photography, we live in the desert south west. No major health issues...and? Two financial advisers said "oh you are poor. you need at least a $1m in the 401K"
We calculate, based on historical spending, that we need $52K a year take home and we will have it, so what's with the "you are poor" comments. I will do my own planning thanks you!
Taking the advice of the person that wrote about being potentially bored being retired and working until you can't is iffy advice at best. I have worked in construction for close to 50 years. When the retirement age for Social Security and our union pensions was 65 years old, for maximum benefits, the retirees that stayed were lucky to live more than 13 months. Granted life styles and better medical inventions have upped the age since the 1960 era. Those that took an early retirements at lower rates lived to 70 years old, then. I am retired because of temporary health problems but they caused my inability to maintain my 37 year old business for 6 months, so I took up three hobbies. I paint pictures, take photos of interesting things and places and read the internet news.
Also being in the laboring fields from the 1960 era, most people did not invest as it was our grandparents and parents that suffered the Great Depression. They were a big influence as families were a lot closer back then. Very few people had enough to invest or had the education to do it reasonably invest wisely.
Doesn't that apply to every stage in life?
Aren't these sins also an impediment to saving for the future and staying out of debt?
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