If you want to achieve financial security in retirement, the main ingredients for success are simple -- save, invest, and live within your means. However, there are some mistakes you could make that could be devastating to your retirement planning.
We asked three of our retirement experts to tell us about these mistakes, and why it's so important to avoid them.
Matt Frankel: One common mistake that could ruin your retirement is relying too much on fixed-income investments and not enough on stocks. This is true both before and after retirement.
Before retirement, a bond-heavy portfolio can make it much tougher to reach your savings goals, and this is certainly the case in today's low interest rate environment. Whereas the S&P 500 has averaged returns of about 9.5% annually over the past 20 years, you'd be lucky to get 4% out of a high-grade bond portfolio. At 9.5% per year, $5,000 saved annually would grow to about $750,000 after 30 years. On the other hand, the same amount of savings would only grow to $280,000 at a 4% annual return. This can make a big difference in your standard of living once you retire.
And after retirement, relying heavily on bonds can actually cause you to lose income over time. Sure, the constant income stream is nice at first, but every year inflation will rob a piece of your money's purchasing power. Assuming a 2% annual inflation rate, a bond portfolio that pays $50,000 per year would only effectively produce about $30,000 in income (in today's dollars) 25 years from now.
The solution is to keep a substantial portion of your assets in stocks, even after retirement. Not only do stocks grow more over time, but the right kind of dividend stocks can produce a solid income stream that keeps up with inflation and then some.
Dan Caplinger: One key mistake that many people make is waiting too long to start saving for retirement. It's easy to let more immediate financial needs take priority over retirement saving, especially when goals like paying down your student loan debt, saving up for a down payment on a home, or putting money aside for your kids' college education seem much more pressing.
Yet what many people forget is that having time on your side makes retirement saving a whole lot easier. Because of the power of compound returns, money that you set aside when you're 25 or 30 years old grows a lot more than the retirement savings you gather in your 40s and 50s, and those who wait have to save a much greater amount in order to catch up with their earlier-starting peers. Moreover, a longer-term strategy can allow you to be less aggressive in your investing strategy, leaving you less exposed to inevitable downdrafts in the market that can sap your confidence and lead you to make emotionally driven investing mistakes.
The most important thing to remember is that you don't have to invest a huge amount early in your career in order to make a huge difference. By allocating even a small portion of your savings toward retirement, you can still keep your other goals within reach while setting the stage for longer-term financial success.
Dan Dzombak: One common mistake that could ruin your retirement is not having a financial plan for retirement.
Last year the Federal Reserve published a report, the "Economic Well-Being of U.S. Households," with the startling finding that of those 45-60+ who were not currently retired, 19% had not thought at all about financial planning for retirement with another 20% saying they had only thought "a little" about it. The numbers were slightly worse for those aged 30-44.
While a little planning can go a long way to set yourself up for a secure retirement, not having a plan is the surest way to ruin your retirement. You need to know how much money you need to have saved to have a secure retirement, the types of insurance you will need, how much you can reasonably spend based on how much you have saved, when you should claim social security benefits, what happens if you continue working, and a whole variety of other issues.
The fact is, not everyone gets to choose when they retire from their main career. Frequently health reasons, a layoff, or other factors conspire to get you out of your job late in life. If you do not have a financial plan before this happens, it is much easier to slip up and make mistakes. Make sure you have thought through financial planning for retirement before retirement is thrust upon you.