Summary: Time is an element of the retirement planning process we can’t afford to waste. By understanding the mistakes that can destroy time, an investor can make time a friend rather than an enemy.
Retirement Planning is not a complicated process. Yet, it is a very detailed process with a lot of moving parts. Due to that, there are some common mistakes that I see people make. Knowing where you might fall short will help ensure you of putting together an effective plan. Here are the seven deadly sins:
Taking Step 1 and Forgetting Step 2
People will often invest the money and feel that they have completed the process when that is only the first step. Step 2 is the most critical process and often overlooked. Once you invest, then those investments need to be managed for risk. You never want to invest the money and then just leave it alone.
“Just save 15% of your income and retire comfortably.” That is the advice given by so many articles. These writers make it seem as if the act of saving is all there is to it. In reality, it takes planning, saving, investing/managing, and monitoring to be successful.
Trusting Financial Planning Software analysis
Financial Planners use planning software to create financial plans. Once a plan is created, it is often viewed as an absolute. Just follow these assumptions, and everything will be as you dreamed. Realistically, these plans are only designed to tell you if you have a chance to be in the ball game. They can create a false sense of reality.
Using target-date funds as a risk management tool
Target date funds are based on your specific retirement age. For example, if you were to retire in 2045, you would invest your money in a 2045 target-date fund. In theory, as you get older, the fund adjusts risk for your age. Unfortunately, that is not always the case, and some of these funds take more risk than you realize. Don’t rely on a fund to manage risk. You need to determine how much risk you want to take.
Focusing on growth rather than growth and risk
The mutual fund industry will tell you growth matters more than risk. They will tell you that it is ok to have a bad year in the stock market because there are more positive years than negative years. They don’t tell you that there have to be more up years than down years because the down years do so much more destruction. For example, the financial crisis in just 18 short months wiped out 14 years of investment gain. Yes, the risk does matter.
Not paying attention
I don’t need to give much description here. I will say that there are more people not paying attention to those who are paying attention.
Not having a plan
This might be the cardinal sin next to not paying attention. Without a plan, how do you know why you are investing, where you are going, and how you are going to know when you get there?
Why is all of this important? Time…..you can’t afford to waste time. Time can either be an ally or an enemy.
Bob Brooks is the daily host of the Prudent Money Radio Show. He writes about stewardship and financial topics Monday through Thursday each week. For questions or advice, feel free to contact Bob at 972-386-0384 or firstname.lastname@example.org.