One of the biggest fears facing all of us is that our retirements won't be financially secure. As employers have throttled back on providing pensions, workers are increasingly on the hook for generating their own retirement income to complement Social Security.
This means that the stakes are high; so we asked our Motley Fool experts to help point out some critical mistakes that many people make that could derail your retirement plans. Read on to learn the things they suggest you avoid.
Matt Frankel: At the Fool, we encourage you to have some fun with your investments. There is nothing wrong with doing a little speculating and buying stocks that have relatively high risks, but also have higher reward potential. However, doing this with money that you are counting on for retirement can be a fatal mistake in regards to your retirement plans.
There is a specific type of stock that belongs in your retirement portfolio -- safe and predictable. Your retirement money should be invested in companies that are in no danger of imploding anytime soon, and have a solid history of steady growth. Names like Johnson & Johnson, ExxonMobil, and Colgate-Palmolive come to mind, just to name a few.
What you shouldn't touch with your retirement money are volatile "it" stocks like Tesla Motors, high-paying, but highly leveraged companies like Annaly Capital Management, or stocks that could eventually turn out to be huge, stable companies but aren't there yet like First Solar or Netflix.
Basically, if you're invested in the right kinds of stocks, your portfolio shouldn't derail your retirement plans, no matter what the market is doing.
Dan Dzombak: One thing that could derail your retirement is using debt to buy stocks or invest in the markets, in general. While using debt, also known as leverage or margin, magnifies your returns if your investments rise, it also magnifies your losses if your investments fall.
Many people learned this the hard way last month as they were using debt to invest in the currency markets. Not even a little debt -- many were investing using debt 25-50 times the size of their accounts. People often argue this is safe, because the currency markets are not as volatile as, say, the stock market is.
Many had been betting that the Swiss franc would fall versus the euro as the Swiss Central Bank had been selling francs to weaken the Franc whenever it reached its peg of 1.2 Swiss francs per euro. When the Swiss central bank removed the peg, the currency strengthened to 0.85 Swiss francs per euro, a 40% move against traders' bets.
The ensuing mayhem resulted in heavy losses and multiple bankruptcies for currency trading firms, hedge funds, and individuals. For example, currency broker FXCM's customers had a total of $200 million in losses greater than the amount of money in their accounts.
Another example that is little known, but interesting, is the case of Warren Buffett's former partner Rick Guerin. Guerin invested in Berkshire Hathaway and other investments alongside Buffett and Charlie Munger. Guerin was in a hurry to get rich, though, and was using margin debt to invest. At one point, the market dropped precipitously, and Guerin was forced to sell all his Berkshire Hathaway shares to Buffett for $40 a share. Those shares now trade for $223,000 each.
If you invest using margin, you need to be correct about how the market moves in the short term, or you can easily get crushed. Save yourself the anxiety and potential financial calamity by avoiding debt.
Dan Caplinger: One mistake that many parents make as their children grow up is to get themselves embroiled in their kids' finances more than they should. A key error involves cosigning on student loans for kids. This essentially leaves parents vulnerable to the financial whims of their children at a critical time in their own lives -- while they're saving for retirement.
When you cosign for your child's student loan, you agree that if your child decides not to repay that loan for whatever reason, you'll take care of it -- even if it means having to repay the entire amount due. That's far from an ideal situation for you to be in as you try to put as much money as possible toward your retirement savings. When student loan bills come due, it can cost you hundreds or even thousands of dollars out of your monthly income. Moreover, with most student-loan debt not dischargeable in bankruptcy, your options for avoiding repaying it are extremely limited.
The best alternative is not to cosign on student loans at all. If your child can't borrow without a cosigner, though, consider simply taking out a loan of your own. That way, you can at least plan for the eventuality of having to repay it, rather than having your child's surprise financial crisis come back and disrupt your already-made plans for retirement.