Investing for retirement income is very different from investing purely for growth. As you approach retirement, there is rarely any good measure of the quality of the investment decisions that got you where you are today. You probably have no way of knowing what the mistakes you made yesterday have cost you today.
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. This list of mistakes can also serve as a litmus test for your investment adviser or manager. If they are recommending any of these mistakes as part of their approach, you should probably look for another source of advice.
Paying too much. Costs and fees are the vampires of the investment world. The market offers a return that is available, through index funds, at a very low cost. This is particularly true through the Thrift Savings Plan, where the cost of participating in the market’s return has been about 1/20th of 1 percent in recent years. It is not uncommon to find investors in retail brokerage, funds and annuity accounts paying 2 percent, or more, for the privilege of investing their money.
When considering all of your investment expenses — advisory fees, management fees, administrative costs, sales loads and transaction costs, — you should not spend more than 1 percent, per year, of your invested portfolio, to plan and implement the right investment program.
Failing to properly diversify. Proper investment diversification is a key to managing investment risk and maximizing your portfolio’s risk-adjusted expected return. One of the reasons for this is that a properly constructed portfolio hedges all types of risk at all times. Of course, you won’t be fully invested in whatever asset type produces the greatest return during any given period, but you won’t be fully invested in the worst performer, either. The problem with poorly diversified portfolios is that they pose too much risk for the potential gain they offer. Sure, you might get lucky, but you probably won’t, and the price you’ll pay for that mistake isn’t worth the risk.
Misallocating your resources. Most of your resources should be applied to analyzing your circumstances, goals, resources and constraints; handicapping the probabilities associated with markets, taxes, inflation and longevity; and determining the investment strategy most likely to meet your needs.
Yet, it’s not unusual to find an investor spending 2 percent, or more, of their portfolio’s value each year trying to beat the market.
Trusting bad advice. Trusting the wrong source for financial advice can lead to disaster. If brokers, bankers, agents and journalists were the answer to the retirement problem, there wouldn’t be a problem. In order to be trustworthy, at a minimum, an adviser or manager must be free from conflict-of-interest, competent in the skills required for the job, experienced in using those skills, and motivated to get the job done right.
The vast majority of those presenting themselves as financial advisors are really just salespeople in disguise. Don’t trust anyone who doesn’t know your circumstances, who has a conflict with your interests, or who won’t accept fiduciary obligation to you — and get their commitment to these requirements in writing.
Confusing “might” with “probably will.” Here’s a trick to use the next time you’re exposed to an investment ad or sales pitch. Try replacing the words “may,” “could” and “might” with the words “probably won’t” and see how the message changes. Successful retirement investing is built on predictability, not possibility. Your investment portfolio should be prudent, not speculative. It should be managed to maximize the probability of producing the returns you need to achieve your goals.
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.