Constructing a smart retirement income plan isn’t easy. Throughout the working years, one has many factors to consider, such as salary, expenses (monthly and unforeseen), debt, and college for the kids — just to name a few. All these factors can affect a person’s ability to, first, devise a consistent plan for her retirement goals, […]
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Constructing a smart retirement income plan isn’t easy. Throughout the working years, one has many factors to consider, such as salary, expenses (monthly and unforeseen), debt, and college for the kids — just to name a few.
All these factors can affect a person’s ability to, first, devise a consistent plan for her retirement goals, and secondly, accumulate the necessary capital to provide ample retirement income. Meanwhile, one can make costly mistakes that will have implications down the road.
A retirement strategy has many moving parts, and each can have a significant impact on the others. Many people often make the same mistakes.
There are ways to avoid them, and much of it is about knowledge. There is more you need to know about retirement today than you did 20 or 30 years ago. It starts with knowing what lifestyle you want to achieve in retirement and the options that will both protect you and enhance what should be the best years of your life.
Here are four common mistakes in retirement planning and how to avoid them:
Investing like you’re still young
Earlier in their working careers, people often have a higher risk tolerance. But approaching retirement, your investment strategy should shift toward preserving capital. Phase out those investments that are subject to wider fluctuations. The gradual move away from riskier investments should begin as you enter your mid- to late-40s in age.
Leaving your nest egg vulnerable to big market drops
Putting your entire nest egg in one basket can be disastrous. Having an excessive amount of market risk in your portfolio, you could find yourself suffering a loss that you won’t have time to recover from before you retire. With stocks having surged for an extended period, beware of the bear market. It would be wise to purge some risk from your portfolio in favor of more predictable methods of capital growth and income, such as annuities, life-insurance policies, or alternative investments such as private lending and real estate.
Not satisfying basic income needs
It has become less realistic for a 401(k) coupled with Social Security to provide the regular income needed for retirement. It’s important to estimate what your yearly expenses will be in retirement and diversify accordingly. Use your investments, insurance policies, or retirement accounts to provide multiple income streams. This allows you to draw from them only what you need to meet your pre-determined budget. Be sure you calculate your Social Security payment and any required minimum distributions, so you don’t incur additional tax liability.
Having the wrong kind of annuity
A crucial component of a comfortable retirement is reliable income, and a common way to achieve that is by using annuities. Unfortunately, some retirees find themselves with an annuity that doesn’t fit their needs. A fixed annuity pays out a guaranteed rate of return, providing less risk compared to variable annuities, but the tradeoff is you get a more modest return. Sometimes a fixed index annuity (FIA) is the best bet. This allows you to protect your principal by shifting the risk to the insurance company selling you the annuity. There are caps on your potential returns, but FIAs are more reliable because they mitigate risk.
With retirement planning, the end goal should be not only to ensure you’ll have enough income to satisfy your retirement budget, but also to provide you with enough to truly enjoy your retirement. Because life goals and the economic climate are subject to change, you need to consult with your financial advisor annually to optimize your strategy.
Jadon Newman is founder and CEO of Noble Capital (www.noblecapital.com). With more than 16 years of experience in the financial-services industry, he specializes in retirement planning, real estate investment, and asset management.