Retirement Planning Mistakes to Avoid: 3 "Retirement Killers"Submitted by Reby Advisors | Certified Financial Planners | Danbury, CT on February 24th, 2017
Whether you plan to work for another 15 years, are counting down the days to retirement, or have already retired, it’s critical to be aware of the sneaky risks that have the potential to derail your plans and lifestyle.
Failing to address these risks is a mistake that may be the difference between a successful retirement and running out of money.
What makes these risks so dangerous to your retirement is that even financially savvy and sophisticated investors may overlook them in decisions that seem logical at the time. Fortunately, awareness of risks is often half the battle in retirement planning.
This article addresses three “retirement killers” to be aware of and address.
Sequence of Returns Risk: Getting Bad Returns Early in Retirement
Sequence of returns risk is a serious problem, but one that is often overlooked or misunderstood. A bad sequence of return could significantly impact your retirement nest egg and cause you to run out of money years earlier than you thought.
The sharp market downturn in 2008-2009 is a perfect example of sequence of return risk. During that vicious bear market, stocks and other assets dropped 50% and more, and there was almost nowhere to hide. Many workers who retired during that market volatility had to either go back to work or accept a lesser lifestyle in retirement than they had originally planned.
Sequence of return risk can also work in the other direction. Workers who retire during periods of stock market strength may become overconfident and take out more money than they should. Those higher initial withdrawals will mean a lower balance going forward, and a much reduced margin for error.
Investors can protect themselves from these sequence of return risk scenarios by thoroughly stress testing their portfolios. There are a number of tools individuals can use to see how their portfolios will do in different market conditions and how their assets may behave in future market downturns. Effective stress testing could mean the difference between success and failure for your future retirement years.
If you’re already a Reby Advisors client, simply ask your advisor for portfolio stress testing. If you’re not, click here and request a Free Retirement Income Plan that includes this analysis.
Longevity Risk: Living Longer Than Your Money Lasts
People are living longer than ever before, and that is certainly good news. When the Social Security Act was first passed, the average life expectancy for American workers was barely longer than the original retirement age. That was good news for the solvency of the fund, but bad news for workers who toiled and saved all their lives and barely got to enjoy the fruits of their labor.
Things are much different today, and average life expectancies now stretch into the 70s and 80s, with many men and women living far longer. Those longer life spans are certainly welcome, but living longer also introduces serious longevity risk.
Longevity risk happens when you plan for a shorter retirement than you will ultimately have. If you plan to retire at age 65, you may think that a nest egg that provides income for 20 or 25 years will be sufficient, but what if you live to age 85, 90 or even 100? Suddenly your 25-year nest egg does not look so great, and you risk running out of money just when you need it the most.
There are a number of ways to address longevity risk, including working longer, taking a part-time job in retirement, reducing the withdrawal rate on your portfolio and putting some of your assets into an annuity that guarantees a lifetime income. For many workers, a combination of all these strategies is what will work best, but every individual will have their own specific needs.
For custom advice specific to your situation, request a free Retirement Income Plan.
The #1 Risk to Your Retirement: Investor Behavior
Thus far we have covered sequence of return risk and longevity risk, two serious issues that could derail your retirement if you fail to address those risks with a solid strategy. What we believe to be the single biggest risk to retirees today, however, is human behavioral risk – according to Dalbar’s Quantitative Analysis of Investor Behavior, causes investors to underperform the market by 3% to 4% annually.
A behavioral mistake refers to an investing error made when trying to time the market by either buying before the price goes up or selling before it loses value. Sounds like a smart thing to do, right? It’s actually a waste of time, and we explain why here in this video and in this three-page Investing Insights report.
Investors make these mistakes because of a natural human tendency to buy when the market is doing well (and prices are high), then sell when the market performs poorly (and prices are low). The result is buying higher and selling lower than you should, when the best course of action is to exercise patience and discipline. (Many studies have shown that even the “gurus” fail at market timing.)
Avoiding behavioral mistakes is a lot harder than it sounds because they’re caused by human psychology. Market volatility, a sensationalist media, and several other psychological triggers make investors their own worst enemy.
Here at Reby Advisors, we collaborate with clients to clarify your goals, time horizon, true risk tolerance and income needs. Our financial planners then propose a strategy to align your assets with your short- and long-term goals so that the temporary fluctuations of the market do not put your future at risk.
Our process is designed to reduce your financial worries, and give you greater confidence that your money will be there for you when you need it most... to buy that second home, travel, spoil the grandkids... whatever makes YOU happy!
If you're not yet a Reby Advisors client and would like advice on whether you're on track to achieve a successful retirement, take advantage of our free Retirement Income Plan.
Tell us a little bit about your goals and current situation below and a CERTIFIED FINANCIAL PLANNER™ professional will send your plan to you within three business days. Discover whether you'll be able to retire on time and reach all of your goals across 1,000 possible economic scenarios.
Based on these stress tests, your plan will reveal your probability of retirement success and advice to improve on it! Get started now!