Costly retirement planning mistakes

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About this same time one year ago we penned an article for Capital Region Living detailing some steps for individuals to take to assume a comfortable retirement. This included detailed information regarding the benefits of starting early, diversifying and making certain that any earnings were credited to your Social Security account. Many times in life it is the potholes that you avoid that determine your success so, with this in mind, we thought it would be beneficial to our readers to outline some of the more costly retirement planning mistakes that we have seen over the twenty-five-plus years that we have been in business.
Probably the most severe and one that we alluded to above is a failure to plan. We liken this to traveling to Florida by car without any type of roadmap. As part of the retirement planning process, we strongly recommend a detailed analysis of where you are currently as well as where you wish to be. After which you should establish a plan of action and then monitor your progress along the way.
Failure to live within your means. If you’re in debt, work hard to escape. We recommend first addressing those debts where the interest rates being charged are high and not deductible. Then work back to your mortgage.
Failure to take advantage of employer sponsored pension plans. Given the transition from Defined Benefit Plans (or ones where your employer has promised a specific monthly benefit determined by your age, history of wages as well as length of service) to Defined Contribution Plans (or ones where the employee and perhaps the employer contribute, but where the employee shoulders the investment risk), it is imperative that you take advantage of this benefit.
The most common defined benefit contribution plans include the 401(k), 403(b) and Deferred Compensation. The employee contributes directly from his/her paycheck and other than the Deferred Comp, a portion is quite often matched by the employer. At the very least, make certain that you maximize the employer match.
Currently, the contribution limits for 401(k), 403(b) and 457 plans are $18,000 per year for those ages 49 and under and $24,000 if you are ages 50 and over. In addition, employees may deposit these contributions into a tax-deductible traditional plan or take advantage of a Roth, which grows tax-deferred and potentially tax-free.
Failure to understand risk as well as opportunity cost. According to a recent study by DALBAR, a research firm that focuses at least a portion of its business on investor returns, the average retail investor typically trails the broader stock indices by more than four percent per year. This is due in large part to entering and exiting the market at inopportune times (aka, responding to greed and fear rather than approaching investing on a disciplined basis).
Failure to keep your eye on the prize. Don’t get caught up in the noise of the day. This will only cause you to abandon your plan as fear is a greater motivator than greed. Focus on and read articles about the long-term benefits of investing rather than the day-to-day fluctuations in the financial markets.
A couple items of note. Bond prices move inversely to interest rates. With interest rates at or near fifty-year lows, it stands to reason that there is a greater likelihood that interest rates will move up substantially rather than down. The result would be a loss of principal. Despite the recent move down in interest rates, it appears as if there is more risk in the bond market than potential for return. That said, don’t ignore bonds as they are a perfect offset to the stock market. Secondly, despite the fact that the stock market has nearly tripled over the past eight years, if history is any guide whatsoever, there still remains some opportunity. In fact, over the past 145 years, for any ten-year rolling period, only four times was the stock market lower at the end of that timeframe as compared to the beginning. Not bad odds for equity bulls.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks, and fluctuations in principal will occur. Research any investment thoroughly prior to committing money or consult with your financial advisor. Note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, call 518.279.1044.

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