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Avoid these five financial planning mistakes

Created date

April 23rd, 2015

We all know we need ample savings and a realistic plan for a secure retirement. Yet, every day retirees and people nearing retirement derail their own financial security by making critical mistakes. Here are five of the most common investing and financial planning errors you should avoid. 

1. Underestimating life expectancy. When many of today’s retirees drafted their financial plans, life expectancies weren’t nearly as long as they are now. Ken Weber, coauthor of Dear Investor, What The Hell Are You Doing? Smart and Easy Ways to Fix the Mistakes You Make with Your Money (amazon.com/Dear-Investor-What-HELL-Doing/dp/1626341613), reminds us that at age 70, it’s quite realistic you may live—and need money for—another 30 years. “Medical research keeps making my life more difficult because I have to tell people, ‘You are not investing for the day you retire, you are investing for the day you die,’” Weber says.

2. Decreasing equity exposure too soon. Because people are living much longer, Justin Hales, CEO of GreenRock Wealth Management (greenrockwealth.com), says it’s a big mistake to get out of stocks and into bonds too early. “Often I find investors need more equity exposure than they assume they will need if they are to have a fighting chance at having their money last for the length of their retirement,” Hales says. “If the expected return of bonds makes generating the proper level of retirement income mathematically impossible, are bonds really all that safe? I think not.”

3. Using your retirement account to pay for other things. Helping with children’s or grandchildren’s education expenses, bailing loved ones out of a tough situation, investing in a family member’s business—there are plenty of worthy goals competing for a slice of your nest egg. But, Coleen Pantalone, finance professor at the D’Amore-McKim School of Business at Northeastern University (damore-mckim.northeastern.edu), says it’s important to resist the temptation to dip into your retirement fund. “Provide the help you can without putting your retirement in jeopardy,” Pantalone says. 

4. Investing based on a “hot tip.” If you’re retired or approaching retirement and realized you haven’t saved enough, it can be tempting to try to make up for lost time with risky investments that promise high returns. Weber says to avoid investing based on what seems like a “hot tip.” “One of the subtitles of my book is ‘I don’t know, you don’t know, they don’t know’—about the stock market or the future of interest rates,” Weber says. “All of the talking heads in the financial press are doing nothing more than making educated guesses. So it’s really not smart to invest on something you see. The only thing we can guarantee is volatility.”

5. Miscalculating retirement expenses. A common misconception is that expenses in retirement will only be 70% to 80% of what they were during your career. Hales says you need to take a closer look at your individual expenses. Sure, you may no longer incur business lunch and dry cleaning expenses when you retire, but your costs for things like travel and health care are likely to increase. “Most surveys of retired persons suggest a dramatic reduction of income in retirement doesn’t really make sense,” Hales says. “After all, who wants to begin retirement by immediately adjusting their lifestyle for living on a reduced budget?”

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