Adviser Fund Update: Planning for Cognitive Aging and Reducing Risk

5 Retirement Savings Blunders You Can’t Afford to Make

5 Retirement Savings Blunders You Can’t Afford to Make

To err is human. To retire in comfort is divine. If you’re saving and investing for your retirement, good work. Your future self will thank you. But are you making the right moves?

This week, we’re reviewing some common mistakes that can befall even the savviest investors as they craft their retirement savings strategy.

If you see something familiar here, trust us, you’re not alone. For 25 years, we’ve partnered with clients to create risk-aware, long-term wealth management plans that work for them. And we’ve encountered each of the items we’ll discuss below (and plenty more).

Here’s one: Sensational headlines and political vitriol can overwhelm even the steeliest investment nerves. But pulling out of stocks in favor or bonds or cash to “protect” your account is just one of the mistakes that investors will make when market volatility is high or fear trumps facts on Wall Street.

As we always say, it’s time in the markets, not market timing that will lead to successful long-term results.

So let’s assume you’re invested for the long haul. While everyone’s situation is different and no two investors have the same goals, there are a few common mistakes we come across. Tune out the noise and check out five retirement savings blunders it pays to avoid.

  1. Taking a “Hands-Free” Approach

BLUNDER: Ideally, your company’s 401(k) or 403(b) retirement plan offers you a wide range of well-managed, low-cost funds, giving you the ability to build a diversified portfolio. Unfortunately, that scenario is just a fantasy for some investors. Fees are still higher than we like to see on many plans, and investors often have a short list of fund choices.

By doing nothing and letting your hard-earned investments languish in an account with limited and overpriced options, you may be missing an opportunity to fully maximize your retirement savings or implement the most effective strategy for your needs.

SOLUTION: When our clients’ company retirement plans stick them with a dearth of investment options or high fees, we check to see if a rollover IRA in retirement makes sense. They get the same tax-free savings and investment power, oftentimes with lower costs and much greater choice.

  1. Cashing Out

BLUNDER: You cash out of your 401(k) or (403)b when you retire. Or you opt for a lump sum when you switch jobs. However, taking a lump-sum distribution can be really costly. When you make withdrawals from your retirement plan, you are responsible for paying income tax on the entire value. All withdrawals from a traditional (non-Roth) 401(k) or 403(b) are taxable. And since you made your contributions pretax, the government is going to come after its share of both your savings and the gains you’ve made over time.

If you’re under 59½ years old? Then withdrawals cost you even more. You will be taxed not just on the distributions but are also subject to a 10% early-withdrawal penalty (though you may be exempt in some plans if you’re between the ages of 55 and 59½).

A final cash-out consideration: It’s possible that by taking a lump-sum distribution, you’ll put yourself into a higher tax bracket, making the transaction even costlier.

SOLUTION: You need to be well prepared when contemplating cashing out. First, consider whether it makes more sense to pay taxes on your account now in your current tax bracket. Or is it preferable to roll your account over into an IRA and pay taxes later in retirement, when you may fall into a lower bracket?

(If you know that you’ll be in the same or a higher tax bracket in retirement, a Roth IRA is worth considering.)

Second, if you decide to cash out or take that lump sum (or to roll over to a Roth IRA), you’ll need cash on hand for that year’s tax bill. The amount could be quite large, depending on how much you’ve saved up over the years.

Want to learn more about the considerations that go into rolling your account into an IRA? Click here for our exclusive report on the subject.

  1. Relying Too Much on Company Stock

BLUNDER: You’ve heard it before: “Don’t put all of your eggs in one basket.” The same goes for investing too heavily in your company’s stock in your retirement account. If the unthinkable happens and your company hits hard times or goes out of business, you could face the unwelcome double-whammy of losing both your job and everything you’ve worked so hard to save for retirement in one fell swoop.

SOLUTION: This is not to say that one shouldn’t invest in their company’s stock in a retirement account. But we advise our clients to hold a well-diversified portfolio and keep that portion of their invested assets small enough so that if disaster strikes, their future financial well-being is not in jeopardy.

  1. Failing to Contribute Enough

BLUNDER: It can be difficult depriving yourself of hard-earned cash in the short-term by contributing the maximum to your 401(k) or 403(b). How much harder will it be to have to look for another job to make ends meet after your so-called “retirement?”

Saving as much as you possibly can while you’re still drawing a paycheck is your best defense against running out of funds after you’ve stopped working. And thanks to compounding, the more you have invested, the greater your potential earnings. Therefore we recommend that clients contribute as much as they can to their retirement savings plans.

(Be sure to check whether your company has a matching funds policy, where they’ll make a dollar-for-dollar contribution to your retirement plan up to a certain point. If so, by not investing in the company plan, you’re essentially passing up a bonus every single paycheck.)

Compounding is a powerful investing tool. The more money you have working for you in your retirement account—compounding gains upon gains, year in and year out—the plumper your retirement goose will grow.

The chart below demonstrates the potent investment fuel compounding brings to your savings. In this example, $10,000 is put into a hypothetical investment in the stock market and grows 10% annually over 30 years (roughly the annual return of the S&P 500 over the last three decades). Interest represents the earnings gained on that initial principal invested, which adds up to a moderate amount over time. But most of the nearly $175,000 after 30 years comes from the ever-increasing earnings made off of previous gains. That’s the power of compounding.

Note: Chart uses hypothetical 10% rate of return for illustrative purposes. It is not based on historical data or actual investment results. Source: Adviser Investments.
  1. Investing Too Conservatively

BLUNDER: Stuffing money in your mattress may feel like the safest way to save. Okay, not literally. But relying heavily on cash is one of the most common mistakes we see people making when saving for retirement or managing their IRA rollover.

The logic, such that it is, goes that because the money they’re putting away is so critical to their future financial security, it should only be invested in risk-free or ultra-safe funds. This painful misconception piles up as the adverse effects of inflation can and will erode the purchasing power of your retirement assets over time.

SOLUTION: To succeed over the long term, we advise our clients to invest a sizable portion of their assets in stocks. There’s no need to take wild risks. Everyone’s risk comfort zone is different. But the goal should be to grow a retirement portfolio over time and maintain the “real” value of assets after accounting for inflation.

We understand that this advice could have a short-term, negative impact on retirement savings in a down market. But ultimately, a long-term focus will overshadow shorter-term market volatility. Historically, stocks have significantly outperformed bonds and cash, a trend we expect to see continue over meaningful, multi-year or decades-long investment timelines.

Helping Your Aging Parents—A Step-by-Step Checklist

Your parents have looked out for you all your life; it can be a real challenge for everyone involved when the roles reverse. One way to face this new phase of life together is to hold a formal family meeting to discuss the best path forward. By working with your loved ones to create and commit to a transition plan before it’s needed, you’ll be able to make sure they’re comfortable and well cared for while respecting their wishes.

For nearly 25 years, Adviser Investments has worked with families like yours to preserve and grow generational wealth. We’ve been through countless difficult discussions, and in our professional and personal experience, there’s no better way to protect against the unexpected and uncomfortable than by starting the conversation with your parents early. This reference guide and agenda checklist is focused on helping you make your family meeting productive.

Read “Helping Your Aging Parents” today!

Mythbusters: 10 Investment Tall Tales Debunked

Every investor wants the market to be simple and predictable, and that’s created numerous old Wall Street saws that regularly recur in the media. Ultimately, many of these myths come down to trying to predict where the market is headed—a foolish enterprise in our view.

Chairman Dan Wiener, Director of Research Jeff DeMaso and Deputy Director of Research Brian Mackey poured several buckets of cold water on Wall Street’s favorite market-timing fables in our latest podcast, with straightforward talk backed by hard data.

There are no shortcuts in investing—steer yourself in the right direction with The Adviser You Can Talk To Podcast.

Among the myths busted:

  • Has it really been a 10-year bull market?
  • “Sell in May and go away”
  • Gold as inflation protection
  • Why real estate can’t stack up to the stock market in the long term
  • And six more…

Listen to “Mythbusters: 10 Investment Tall Tales Debunked,” and if you would like to be automatically notified when we release new episodes, subscribe to our investment podcast series!

About Adviser Investments
Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual funds, ETFs, fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, trusts, foundations and institutions meet their investment goals. Our minimum account size is $350,000. For the sixth consecutive year, Adviser Investments was named to Barron’s list of the top 100 independent financial advisers nationwide in 2018 and made its list of the top advisory firms in Massachusetts for the seventh year in a row in 2019. We have also been recognized on the Financial Times 300 Top Registered Investment Advisers list in 2014, 2015, 2016 and 2018.

For more information, please visit www.adviserinvestments.com or call 800-492-6868.

Disclaimer: This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations, personal investment advice or considered an offer to buy or sell specific securities. The views expressed in this update are subject to change at any time. Mutual funds and exchange-traded funds mentioned herein are not necessarily held in client portfolios. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2A, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

The Barron’s rankings consider factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. This award does not consider client experience and is not indicative of future performance.

Editors at the Financial Times bestowed “elite” status on 300 firms in the U.S., as determined by assets under management, asset growth, longevity, compliance record, industry certifications and online accessibility.

The Adviser You Can Talk To Podcast is a trademark of Adviser Investments, LLC. Registration pending.

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