Investing for retirement income is different from investing purely for growth.
Once you retire and begin withdrawing from your investments to support your standard of living, a single mistake can mean a significant compromise to your standard of living — if not today, maybe 10 or 20 years down the road when it’s too late to recover. Because of this fact, investing for retirement income is much more an exercise in avoiding mistakes, than an exercise in maximizing the potential for gains.
Avoid the following common mistakes and you’ll be well on your way to maximizing 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 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 in any other investment account. 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 to accomplish 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 vagaries of 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, in exchange for this low volatility, your ultraconservative portfolio, when combined with your lifestyle, is certain to run you out of money while you still have some living to do?
Improper focus. 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 that stock you hold in such 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 fabulously wealthy, for example, if you can’t pay the bills when they’re due. Having the cash you expect to have, when you expect to have it is the name of the retirement investing game.
This list of mistakes can also serve as a litmus test for your investment adviser. If he recommends any of these mistakes, you should probably look for another source of advice.