Five Retirement Planning Issues to Avoid

Key Takeaways:

  • Avoiding these common retirement issues could help with your financial planning for retirement.
  • Natural emotions and biases can be a challenge for retirement planning and could even derail your long-term retirement plan.
  • Embracing and learning from your mistakes could help you gain the knowledge and experience to improve your financial situation.

Your retirement planning may require more than just knowledge of how to take Social Security benefits or how to contribute to retirement accounts. You also need to know how to avoid making financial mistakes. Here are five mistakes to avoid when planning for retirement:

  1. Underestimating your time horizon. Some investors think their time horizon is the age when they retire. But this doesn’t take into account your life after your retirement date. Your investment time horizon is how long you need your assets to provide for you—which could be longer than you think. According to the Centers for Disease Control, the average 60-year-old American man lives another 23.3 years.[i] The average 60-year-old American woman lives 24.7 more years.[ii]

That means a retiree could have decades of retirement to fund. You should carefully consider how to allocate your investments appropriately to provide enough growth to provide for your entire retirement. Bear in mind that your individual situation, family history and health history can have a significant impact on your life expectancy. But overall, if you don’t want to run out of money after you’ve retired, you may need to plan for a longer time horizon than you initially thought.

  1. Relying solely on income-generating investments for cash flow. Many retired investors lean on their investments for cash flow. But some may mistakenly assume investment cash flow is only generated by income-bearing assets such as bonds or dividend stocks.

Cash flow is any money withdrawn from your account, regardless of the source. Income-generating investments can be one source, but they aren’t the only means to generate cash flow. Although they may be favored by some retirees seeking to reduce the effects of market volatility, income-generating investments do also have risks.

For instance, increasing allocation to bonds increases inflation risk—the risk that your investments won’t grow enough to keep pace with inflation. Income from stock dividends, on the other hand, isn’t a free lunch. A stock’s dividend payments could reduce its share price. Dividend payments can also be reduced or suspended by the issuing company. One alternative cash-flow source is stocks. You could invest in stocks and sell slices periodically to build cash. This approach—what we call homegrown dividends—can offer some flexibility and potential tax benefits.*

  1. Allowing emotions to steer your investment decisions. To reach your retirement planning goals, you may need to avoid common emotionally based mistakes. Consider recency bias, which is investors’ tendency to let recent trends influence their future outlook. When market volatility rises, some investors may experience fear and exit the market. However, past performance doesn’t indicate future results—meaning that recent market volatility does not necessarily mean anything about future market performance.

Other investors may experience confirmation bias, which is the tendency to only look for and accept information that confirms their beliefs. Investors may not consider reliable sources and data just because it doesn’t fit with what they currently believe in. Ultimately, emotions and biases can weaken your capacity to remain objective and make the best financial decisions for your retirement.

  1. Failing to own and learn from mistakes. If you make a “mistake” in investing, pretending it didn’t happen or seeking a scapegoat won’t serve you. Instead, own up to it, accept it and learn from it. Embracing and learning from your mistakes can sometimes be a challenge.

Nobody enjoys making mistakes, but everyone makes them, from legendary money managers to first-time investors. The quicker you admit your mistakes and understand their lessons, the better off your portfolio will be. It would be a shame to miss the lessons of such mistakes and risk repeating them.

  1. Deviating from your longer-term investment strategy. A well-crafted retirement plan should be designed to help you meet your long-term goals. Stocks’ longer-term historical average return is 9.9%.[iii] This includes bear markets, which means you don’t necessarily have to avoid every bear market to enjoy stock market returns. Sticking with your plan, rather than changing it based on your emotions or recent market performance, could produce more favorable results in the long run.

Fisher Investments Can Help

Even experienced investors can make some of these common investing mistakes. If you need help navigating your retirement planning, from understanding Social Security benefits to investment allocation decisions, contact Fisher Investments today. We may be able to help.

* The contents of this guide should not be construed as tax advice. Please contact your tax professional.

[i] Source: Centers for Disease Control, National Vital Statistics Reports, 2010 United States Life Tables, as of 08/21/2019. http://www.cdc.gov/nchs/data/nvsr/nvsr63/nvsr63_07.pdf

[ii] Ibid.

[iii] Source: FactSet, as of 01/18/2019. S&P 500 returns from 01/01/1926 to 12/31/2018.

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Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.