If not already retired, we are all on a journey toward that sometime elusive goal. Some have a very detailed plan while others wing it. Regardless, we all make mistakes along the way so we thought that 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 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 travelling 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.
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 of which is quite often matched by the employer. At the very least make certain that you maximize the employer match.
Failure to understand risk as well as opportunity cost. According to a recent study by DALBAR, a research form 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.
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 six years if history is any guide whatsoever, there still remains some opportunity. A recent article in Barron’s Magazine (January 12, 2015) details the returns of the stock market from 1871-2014. It revealed that over any rolling ten year period (there were 134 of these) only 4 times was the stock market lower at the end of that timeframe. Not bad odds for 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. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please 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, Please call 518-279-1044.