Retirement Planning Mistakes to Avoid

In this article, Fisher Investments UK discusses common retirement planning mistakes to avoid.

Key Takeaways:

  • One of the biggest mistakes people make in retirement planning is failing to diversify within their retirement accounts.
  • Retirees often underestimate how long they need their retirement savings to last.
  • Regardless of how much time you put into retirement planning, making emotional investment decisions can hurt your chances of meeting your retirement goals.

The key to success in retirement lies in having a plan that fits your situation. When developing your retirement plan, you may benefit from learning from some common retirement planning mistakes. In this article, we will discuss some common retirement planning mistakes that we come across and how to avoid them.

Failing to Diversify Your Retirement Plan

Diversification refers to how broadly your portfolio invests across different companies, securities and parts of the market. If you’re investing in equities, you should consider monitoring three different types of equity diversification in your retirement planning portfolio: security-specific, sector and country diversification.

  • Security-specific diversification. Many investors incorrectly believe they need to invest in funds—rather individual equities or fixed-interest securities—to diversify their assets. However, we believe most high-net-worth investors can properly diversify their portfolios using individual securities as long as you spread their risk across various sub-asset classes—such as sectors, countries, fixed-interest duration or company size.

Many people understand the importance of not investing too heavily in one company, so they often elect to acquire their equity exposure through funds. Funds come in all shapes and sizes, whether they are actively managed mutual funds, exchange-traded funds (ETFs) or index funds. These can be great tools that help some investors diversify across various companies, but a common mistake we find is that investors tend to over-diversify their retirement savings.

Owning too many equities can make even matching the performance of the overall market difficult once fees are taken out. Individual equities and fixed-interest securities are often held in multiple funds, so if you hold many funds, this could lead to an unintended over-concentration in certain securities.

  • Sector diversification. Equities in the same or related sectors tend to have positive correlation—they often react similarly to one another. In 2000, technology equities were bid up to overly-optimistic levels, only to come crashing down. So whilst you might be diversified across various companies, you still may be over-concentrated in one sector, which may be risky.

How do you know if that is the case? One way is to compare your weight to the broader market by using a benchmark. An appropriate benchmark can help you measure relative risk, return and weights towards certain sectors, countries and other parameters. Don’t just find any index that matches what you happen to own. Rather, pick a broad market index and use it as a blueprint for portfolio construction within your retirement account.

  • Country diversification. Just as certain market sectors sometimes take a bigger hit than others, the same can be said for the markets of individual countries or regions. Diversifying your investments globallycan help spread risk across continents, currencies and regions. However, like any other type of investing, country diversification comes with risks. Foreign political systems and regulations may operate differently from those in the UK. Foreign governments can decide to increase barriers to trade at any time. Meaning if you fail to diversify outside of a single country, you could be taking on more risk than necessary. 

Underestimating Your Investment Time Horizon

One of the bigger mistakes we see investors make is underestimating their investment time horizon—how long their retirement savings will need to provide for them. Investors often think of time horizon as the time until they retire. They save as much money as they can in their retirement accounts until the day they retire with the intention of growing their nest egg. But your investment time horizon doesn’t necessarily end on the day you retire.

With advances in health care, people are living longer today than in the past. That means your money may need to last longer. A longer investment time horizon may mean planning for things like long-term care for you or a spouse.  

Depending on your cash-flow needs and return objectives, you may need to plan for more growth over a longer investment time horizon. Increased volatility—commonly from equity exposure—can allow for increased returns over the long term. While a fixed-income portfolio may not provide the growth necessary to meet your long-term cash flow needs and counter inflation. With rising health care costs, you may also need to anticipate additional health-related expenses.

Generating Insufficient Cash Flow

It’s common for retirees to overlook exactly how they will generate cash flows in retirement. After being told their entire life to save as much as possible, it may be difficult to determine how to generate necessary retirement cash flows. Whilst many people can use their pensions to help develop an income stream, you may need more regular income to maintain your current lifestyle. We recommend estimating how much your retirement lifestyle will cost before determining how you will pay for it.

Once you have estimated how much your retirement lifestyle will cost, you should calculate any income you will receive outside of your investment portfolio. Some of the most common sources of non-investment income include:

  • Salary: Do you plan on working part-time in retirement? Some retirees find part-time jobs as a good way to pass time and a supplement their other retirement savings.
  • State Pension: Once you reach state pension age, your state pension can be used to fund some of your needs in retirement. However, if you wish to maintain your current lifestyle in retirement, you may require additional funds.
  • Workplace Pension: If your current or former employer offers a pension, you should determine how much you can expect to receive on a regular basis.
  • Business and Real Estate: If you have ownership in a business or investment property, this can be a consistent source of income once you retire.

Once you’ve accounted for these sources, you can fill in the gaps by deciding how to take income and cash flows from your retirement savings.

Making Emotional Investing Decisions

An ideal retirement plan requires sticking with a long-term strategy that is best suited to help you meet your long-term investment goals. That may mean staying disciplined in volatile times. Powerful emotions such as fear and greed drive many people to make ill-timed trades in and out of the market.

If you have a decades-long investment time horizon, you can likely expect to go through both rising and falling markets. If your long-term strategy calls for equity exposure, reacting by getting out of equities at the first sign of negative volatility could be a recipe for disaster. If you’re wrong, you could miss out on some of the subsequent rebound!

After equity prices have fallen, investors who suffered losses may consider abandoning equities to protect their nest egg. But if their long-term investing goals required growth, their chances of meeting their goals in retirement may dwindle if they invest too conservatively after a downturn. Don’t let one downturn scare you out of equities. Investors who need long-term portfolio growth and are able to weather the volatility may have a better chance of achieving the long-term investing goals.

Fisher Investments UK Can Help

Effective retirement planning takes discipline and time. Fisher Investments UK can help you review your investment accounts and avoid these common retirement planning mistakes. If you have any questions on any of the retirement planning mistakes covered in this article or would like to learn more, contact us to speak with one of our qualified representatives today.

Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.