When you are young and just starting your career, it is difficult to determine how the investment decisions you are making will someday affect your standard of living in retirement. If you’re already near or in retirement, you probably don’t know how much that mistake you may have committed 20 years ago is costing you today. You bought this and sold that from time to time, and here you are. Once you retire and begin withdrawing from your investments to support your standard of living, however, a single mistake can become painfully evident, down the road — in 10 or 20 years — when it’s too late to recover.
Investing for retirement income is much more an exercise in avoiding mistakes than an exercise in maximizing the potential for gains. If you can avoid the following common mistakes, and you’ll be better positioned to maximize the standard of living you’ll enjoy throughout your retirement:
Saving to the Thrift Savings Plan last. The TSP is the best retirement savings and investment vehicle you’ll find anywhere. While you’re still a federal employee, you should direct your retirement savings into your TSP account before they go anywhere else.
Leaving the TSP too early. Keep and manage your TSP account for as long as possible after you retire to take advantage of its unique benefits. You won’t beat the risk and return proposition offered in the TSP. Whenever possible, move your traditional IRA or employer-sponsored plan money into your TSP account.
Relying too heavily on investment products. There are four investment products that you should consider universally useful: TSP, low-cost exchange-traded index funds, discount brokerage accounts and immediate fixed annuities. Everything you want in investing can be accomplished optimally with some combination of these four. Most others are nothing more than expensive decoration. There is no investment product or security that meets all, or even most, needs. If you want the most out of what you’ve got, avoid prepackaged products.
Ignoring risk. There are many types of risk as you proceed toward, and through, retirement. Investors too often focus on the risk that seems the most threatening: the risk of loss in the investment markets. This focus on loss often leads investors to reduce investment volatility and sacrifice the potential for return. While you should avoid the unnecessary risk that can go with chasing more return than you need, squeezing too much return potential out of your portfolio can doom you to failure later.
Your success as an investor depends on two factors: where you are today, and what happens in the future. As the value of your portfolio falls with the market, its prospects for future growth actually climb. Conversely, as markets, and your portfolio’s value, climb, the expected rate of return for both tends to fall.
Many investors feel more confident with a portfolio comprised of only cash equivalents and bonds. While the volatility of such a portfolio will be relatively low, how comfortable will you be if your ultraconservative portfolio runs out of money while you still have some living to do?
Focusing on the wrong things. Think paying off your mortgage in retirement is important in achieving the highest standard of living possible? It’s probably not. The same is true of finding the best mutual fund, or continuing to defer capital gains taxes on stock you hold in large quantities. Too many investors focus on the trivial at the expense of the critical.
Retirement investing is not about building economic wealth,; it’s about supporting predictable cash flow. It doesn’t do any good to be wealthy, for example, if you can’t pay your bills when they’re due. Having the cash you expect to have, when you need to have it is the name of the retirement investing game.
Many investors worry about the first few years of their retirement, since that’s as far as they can see into the future with any feeling of certainty, but iIt’s the last few years of retirement that are the most uncertain. Make sure that you manage your investment portfolio to support every year of your retirement, and treat the last year as though it is as important as the first — because it is.
Mike Miles is a Certified Financial Planner licensee and principal adviser for Variplan LLC, an independent fiduciary in Vienna, Virginia. Email your financial questions to firstname.lastname@example.org.