5 Blunders to Avoid When Investing for Retirement

Blunder #1: Placing “Big Bets”

Few people would go to Las Vegas, put a big portion of their life savings on the table and make only one roll of the dice. While the reward for winning that bet might be huge, the probability of winning simply isn’t worth the risk of losing and the pain that would bring. Yet time and again, take the gamble, albeit not in such dramatic fashion.

The most common “big bet” often isn’t viewed as a bet at all. That bet is holding a large portion of your retirement savings in stock. Sure, you might like to play the market and think its prospects are good. But that may mean making investment decisions based on emotion, and that is likely not best.

Betting with your retirement savings can be tempting, especially if you feel the need to catch up on your retirement savings or if the person giving you the tip is someone you respect. But that is again mixing emotion and financial decisions, a potential recipe for regret.

Blunder #2: Not Knowing When to be Conservative

The phrase “conservative investing” implies a prudent and cautious approach with low risk and less volatility. It conjures up images of predictable income streams, the protection of principal and peace of mind. Many conservative investments can provide that and, in fact, might be the right decision for some investors or for a portion of their portfolio.

But “conservative investing” may not always be as safe and prudent as it sounds. For example, many investors associate bonds with safety. In the short term, bonds have been less volatile than stocks. But, you might be surprised to learn that over a long time horizon- 30 years or more- bonds actually have a higher volatility. This is because bonds have many risks.

One such risk is that their value can fall dramatically if interest rates go up. This is because bond prices and interest rates have an inverse relationship. For example, if you need access to your bond investments to pay for a wedding, help an adult child make a down payment on a home, deal with unanticipated home or medical expenses or if you simply want access to cash now, you could be faced with selling a bond below the price you paid for it.

​With interest rates recently near historic lows, you should ask yourself: Do you believe interest rates are more likely to go up or down in the next few years? If you believe “up”, then you’ve just proven to yourself that bonds are not as low-risk as they appear to be.

A better alternative would be a fixed index annuity (FIA). We at Summerlin Benefits like to call FIAs “Safe Money Strategies,” because they protect your money during steep market declines and allow for growth during market increases. You get to have your cake and eat it too! Retirees also find value in the fact that FIA provide just enough access to their cash to ensure liquidity needs are met when they need it most. In other words, they have the freedom to help pay for that wedding or down payment!

Blunder #3: Falling for a Ponzi Scheme

Remember the Bernie Madoff scandal? Madoff masterminded one of the largest financial frauds in history, cheating the wealthy, charities, and everyone else he could. One of the reasons he got away with it for so long was that his firm was both the money manager AND the custodian of funds. His firm controlled the supposed “investments” he was making. There’s nothing wrong with that. It’s called a managed account and it’s what most wealth managers do as well.

However, many money-management firms don’t take the actual custody of the funds, but instead use highly respected third-party firms like large banks. That means the custodian maintains custody of your investments and is independent from your advisor. This helps protect you from fraud. So, while not all money-management firms that take custody of your funds are crooked, virtually all Ponzi schemes rely on controlling custody of your funds.

Do yourself a big favor right now: if your investments are managed by anyone other than yourself, make sure you know who your custodian is and that they are an independent, distinct, and separate entity from your money manager, whose control is limited to helping you make decisions. (That is often the case with brokers who use their firm as the custodian. Just be sure there’s separation.) Having a custodian won’t prevent your money manager from making blunders or mistakes, but it will restrict the money manager’s ability to make transfers and loot your account.

Blunder #4: Paying Excessive Fees

Many retirees end up paying excessive fees, often times without even being aware of it. This makes it less likely that they can achieve their own long-term goals. Fees can cost you hundreds of thousands of dollars over your lifetime. In addition to the obvious, out-of-pocket costs, the money unnecessarily spent on fees also loses the power of compounding returns, which can add up to significant amounts over a lifetime of investing.

Even seemingly small differences in fees can make a huge difference in the amount of money you end up with. For example, let’s assume you invest $1,000,000 in two mutual funds over twenty years without taking any distributions. Additionally, let’s assume they have an average annual return of 10%, but one has annual fees and expenses of 1.5% and the other, 2.4% (both are assessed at the end of each year.) All things being equal except fees, the one with the lower fees will put over $800,000 more in your pocket over time.

Blunder #5 Ignoring the Insidious Effects of Inflation

Right now, the United States is in an inflation spike. But, why does this matter to you as an individual? First, your personal inflation rate might be much higher. Let’s say you have a spouse who requires long-term care and you have three grandchildren who will be starting college over the next few years. You have promised to pay their tuition and fees. Because the cost of these services has risen much faster than other goods and services in the economy today, these expenses could have a large impact on your retirement nest egg. Second, even a small increase in inflation barely perceptible in our weekly or monthly spending can make a huge difference in spending power over time, even if not necessarily visible today.

So, whether inflation becomes an even more dramatic problem or is simply an ongoing, steady erosion of your purchasing power, you should prepare. A conservative, fixed-income investment strategy may result in slow and steady growth rates, but that’s not necessarily a bad thing; these investments will prevent you from experiencing the losses that put you far behind inflation.

Summerlin Benefits Consulting, Inc. helps people identify and combat these 5 potential blunders every day. We focus on safety in retirement planning and help our clients find the best strategies to match the financial goals that are most important to them.