Catastrophic thoughts about the future of our global economy have stood tall in the minds of most throughout the past six months -- and with good reason. Amidst great political uncertainty, social discord, and widespread economic strife, many people have felt that their chances of ever retiring are becoming slimmer by the day. It's now as important as ever to return to the basics of what actually will impact your odds of a financially successful retirement. Below, we explore five behaviors that are far more likely to impact your long-term success than the current recession.
1. Not investing early enough
One of the keys to understanding the benefits of compound interest is to first realize that money saved in the earliest stages of your career will provide the most benefit when it comes time to retire. Contributing to your employer's 401(k) plan, at least up to the employer match, is a non-negotiable. Contributing the annual maximum -- currently $6,000 -- to your Roth IRA as early on in the year as possible (or a backdoor Roth IRA if you are not within the income limits) should be considered an emergency. Taking advantage of these two core retirement practices every year -- and only these -- will ensure you're capitalizing on favorable investment growth and tax treatment for as long as you possibly can.
2. Obsessing over market movements
It's well established that obsessively following every tick up or down is more likely to harm your investment performance than it is to improve it. What is critical to your success, however, is to determine an appropriate asset allocation (the relative proportions of money held in stocks and other assets) and continuously add to it -- regardless of what is happening in the market.
A common desire when the market starts to plunge is to exit your positions, which is the "exactly incorrect" response. This is an opportunity to continue investing normally, purchasing more shares with each new infusion of money, and reaping the benefits as the stock market grinds higher over time.
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3. Neglecting your estate plan
Taking the time to ensure your estate plan is updated is not optional -- this is something that must be done at least annually as you approach retirement age. This involves putting together and updating the proper documents related to the later stages of life, and it also requires enlisting at least one other family member, friend, or professional to audit these documents to ensure they're prepared correctly. If you don't take the time to do this, you risk leaving a mess for your family and other heirs, and also leaving the final distribution of your assets to the whims of the state courts. It's simply essential to take control of your estate plan and communicate it explicitly to those who need to know.
4. Relying too heavily on Social Security
The reality is that even if you are expecting a strong Social Security check in retirement, it's very unlikely going to be able to cover all of your expenses in most locales around the United States. You'll want to investigate the other avenues of income generation in retirement, many of which involve not retiring at all. Consider the benefits of holding income-generating investments to supplement Social Security checks, such as high-yield dividend stocks or intermediate term bond mutual funds. Social Security can provide a cushion, but retirement requires you to build your own chair. Take pride in building a portfolio that can help generate additional income when you're ready to retire.
5. Ignoring real risks
This usually begins with maintaining very strong insurance policies -- more than you think you'll need. Even if you don't use every benefit under an insurance plan, by over-insuring your health and other important assets, you know you're covered in the event something very unexpected should happen. I'm of the view that peace of mind is priceless, and by paying for a comprehensive health insurance plan, you're giving yourself the gift of serenity -- even if you don't end up using the plan to its fullest extent.
In 2020, you also need to be very aware of your digital assets -- this includes passwords, mobile device data, and any other identity-related information that might be floating around on the dark web. Just one scammer with access to your Social Security number can decimate your credit score. Review the websites that have your information and determine if they have it on a need-to-know basis or on a casual basis, and don't be afraid to pay for additional security or restrict this information to only those who need it. Remember that information written on the internet can be permanent, so be sure to be careful what you write.
Every recession to this point has ended with a great expansion. Try not to focus too much on the short-term market drama, and realize that there are many other controllable threats to your retirement plan that you can manage. Stick to your long-term goals and broader financial plan to find sustained financial success.
