With Social Security only replacing a fraction of income, and pensions a rarity, it's up to each of us to build our own retirement. However, mistakes are the potholes on the long road to retirement. And while the vast majority of those mistakes are little more than minor speed bumps, sometimes they can create a lot of burdens, and make it much harder to reach the finish line than you thought it would.
We asked three of our retirement and investment planning contributors to weigh in on the topic of retirement mistakes -- particularly ones that people need to stop making today -- and here's what they had to say.
Putting it off hurts more than you realize
Selena Maranjian: One of the worst mistakes many people make regarding retirement is putting off preparing for it. You might, of course, be contributing some money into a 401(k) account at work, but if you're just assuming that that plus Social Security will carry you through your golden years, think again. You need to develop a retirement plan, and then execute it -- ideally beginning today, or very soon. When it comes to saving and investing, procrastination can be surprisingly costly.
To understand just how costly, imagine that you plan to sock away $8,000 per year for 20 years, in order to fund your retirement, and you expect to earn an average annual return of 8%. What happens if you put it off and start this investing in earnest two years late?
Well, if you sock away $8,000 annually for 18 years, and it grows by 8% annually, you'll end up with around $323,570. What if you didn't procrastinate and followed your plan for a full 20 years? Then you'd end up with $395,383 -- more than $70,000 more dollars! Note, too, that you end up with more than 70,000 extra dollars just by having made two extra $8,000 investments, or $16,000.
The earliest dollars you invest have the most time to grow, and can grow the most. By putting off saving aggressively for retirement, you're leaving many thousands of dollars on the table.
Be sure to spend the time to figure out how much you will need in retirement, and how you will amass that sum. If you start saving and investing effectively -- such as in inexpensive, broad-market stock index funds -- while you're still young, it won't be too painful. If you put it off until your 40s or 50s, you'll probably be needing to save much bigger sums.
Rebalancing your assets (especially as retirement gets closer)
Dan Caplinger: One of the biggest mistakes that retirees have made following long bull markets is forgetting to rebalance their investment portfolios on a regular basis. Before the financial crisis in 2008, the long bull market had given many retirement investors huge gains in the stock portions of their retirement savings, and that had pushed their allocations to stocks well above where they had originally started. The ensuing bear market plunge in 2008 and early 2009 was painful for everyone, but it was especially damaging to retirement investors who had above-average exposure to stocks from the previous bull-market advance.
Rebalancing simply involves selling off a portion of assets that go up in value when they start to represent a higher proportion of your overall portfolio than your asset allocation strategy says is appropriate. You then take the proceeds, and buy assets that have fallen in value, and now make up a smaller portion of your portfolio.
By rebalancing once a year or so, you always have your portfolio tuned into the risk-reward relationship that makes you comfortable, and that can help you prevent any uncomfortable consequences if the market behaves badly. If you don't rebalance, then you're running the big risk that a market downturn will cost you a larger portion of your paper gains than you had thought.
Doing too much can hurt as much as doing too little
Jason Hall: One of the hardest lessons that gung-ho investors have to learn is how much successful investing is about staying out of the way. With the notable exception of managing asset allocation -- as Dan describes -- the best approach most people should take with their portfolios is to choose the best investments available, invest in them, and then get out of the way.
The reason why, is simple: The (vast) majority of people do worse when they actively trade, and usually because their timing stinks.
Let's take a look at Dalbar's annual Quantitative Analysis of Investor Behavior, which compares fund investor returns to those of the funds they invest in. According to the 2015 QAIB report, individual investors in mutual funds have generated on average 2.47% annualized returns between 1985 and 2014. Over the same period, the funds averaged 3.79% in annualized returns.
While some of the timing cannot be avoided -- you have to buy at some point, after all -- the majority of underperformance is from investors selling in market downturns, then sitting on the sidelines when the market begins to recover, only to reinvest near the top, missing out on all the "up" before the next downturn happens. Classic selling low and buying high.
If you do a lot of trading, or tend to move your retirement savings in and out of funds based on what you think the market is going to do, the evidence is clear: You're making a big mistake, and it's hurting your returns.
Here's just how much: According to the 2015 QAIB, the average mutual fund investor would have more than doubled a single 10,000 investment over the 30 years measured. However, if that $10,000 had simply been left in the average mutual fund, it would have grown to $35,846. In other words, doing less would have resulted in significantly more money.
Stop planning to fail
The common thread for these three mistakes is that they are most often caused by a failure to plan. If you truly want to attain your retirement goals, take a step back and evaluate what you're doing (or not doing), and get back on track. If you're making one of these three mistakes, there's no time like now to remedy that, too.