The most dangerous retirement planning mistakes we make are the ones that seem like smart decisions at the time. By the time we realize our error, it's often too late to do anything about it. The only real way to avoid these costly mistakes is to think through the long-term implications of our decisions before we make them.
Below, we'll talk about three of the most costly retirement moves you can make, and what you can do if you've already started down one of these paths.
1. Investing too conservatively
Investing conservatively can feel like a smart move, especially when the stock market seems like it's heading for a potential crash. But being too conservative can actually make it more challenging for you to save enough for your future.
Avoiding stocks may help you avoid some short-term ups and downs, but over the long term you probably won't do as well. Stocks tend to offer higher earning potential than bonds, and these additional earnings help ease the savings burden on you. When your investments aren't earning as much, you have to save even more on your own each month to make up for it.
If you wanted to save $1 million and you had 30 years to do it, you'd only have to save about $481 per month if you had all your money invested in stocks that earned a 10% average annual rate of return. But if you kept all your money in bonds that earned a 6% average annual rate of return, you'd now have to save about $1,022 per month to reach your goal.
In actuality, you aren't going to want all your money in either stocks or bonds. A good rule of thumb for how much to keep in each is 110 minus your age -- that is, you keep 110 minus your age in stocks and the rest in bonds. So a 50-year-old would keep 60% of their savings in stocks and 40% in bonds. Over time, they move their money to safer assets, but they do so slowly to capitalize on the high earning potential of stocks.
2. Trying to time the market
Investors who are less wary of risk may be tempted to time the market, betting big on stocks they expect to do well in the hopes of getting rich quickly. This strategy can work, but it has about the same odds as winning the lottery. You're much more likely to lose a considerable amount of your savings this way.
You're better off keeping your focus on the long term. Choose companies that are at the forefront of their industries or that you believe have a competitive advantage over other companies offering similar products or services. Focus on the ones you believe will still be doing well in 10 years.
Make sure you're diversifying your portfolio too. Keep your money invested in at least 25 different stocks in a few different industries so that a single stock or industry doesn't affect your portfolio too much at any given point. Or you could try investing in an index fund. These low-cost investments give you an ownership stake in hundreds of companies at once.
3. Putting your kid's college education before retirement
With college costs rising, many parents want to help their kids pay for college so they can get a good start in life. But many don't realize that in doing so, they could actually be creating bigger financial headaches for their children when they're older.
If you put off investing for your future to fund college and then you're unable to cover the cost of your retirement later, you'll have to rely upon your kids to support you, possibly for decades. This can cost a lot more than a college education, and the financial strain may make it difficult for your children to save for their own retirement or their kids' college educations.
While it may seem counterintuitive, you should focus on your retirement savings first. Then, if you have some extra cash left over, you can give it to your children for college.
If you're not able to give your kids the financial assistance you'd like, look for other ways to help them. You could let them continue to live with you during or for a couple years after college so they don't have to pay rent. And you can help them find scholarships they qualify for to bring tuition costs down.
Following the tips above can help you avoid some costly retirement mistakes, but that doesn't mean you'll never lose money. Ups and downs happen to everyone, even experienced investors. The important thing is to be patient and always keep your focus on the long term.