Last week, I spoke about Social Security and Medicare, as they relate to retirement. I also cited the fact that people are simply not putting money away for retirement but think that Social Security by itself will take care of their expenses. Nothing could be further from the truth.
The problem is that everybody knows what to do but they never do it. In effect, they fall into traps, or habits, that ruin any chances of saving. You could chalk this up to mistakes because that's what they really are.
Mistake #1. Letting time pass you by and not getting started with some retirement savings plan. In another Friday sermon, I told you about how when I was a kid in elementary school, we were forced (by the school) to open a savings account and to bring a part of our allowance in every Monday to put into that account. It was a forced savings. In fact, I know of one financial advisor in Florida who would tell his own kids that they could do whatever they wanted with their allowance but that they could use only 85 percent of it for movies, video games, and the like. The other 15 percent had to go into a savings or other account and remain there to grow.
The intent behind this is rather obvious. He made sure that the 15 percent would be invested in a savings account from where he could send it on to a mix of high quality growth assets. As we all know, it is compound growth that will increase your balance rather quickly.
Mistake #2. Not saving on a regular basis. How many people do you know who start out with that $1,200 treadmill at home and then within two weeks, can't find the time to do it any more? (Yeah, Bill, I'm listening.) My son is pointing a finger at me...again. You must invest regularly--not just when the mood hits you--in order to get savings to grow. Case in point. When my mother died three years ago, I found she had a tax-free bond account with some $3,000 in it. I decided to keep it intact and so each month, I would drop in a minimum amount...just to see what would happen. I made sure that dividends were reinvested. After three years, that $3,000 is now worth $23,000, all because of a regular investment schedule.
The bottom line here is that if you don't invest on a regular basis, you can't expect your savings to grow. Also, keep in mind that this allows a measure of dollar-cost averaging to occur which helps to avoid buying solely near the top of a market or selling at the bottom.
Mistake #3. Not leveraging tax-free investments. There are many ideas here such as those tax-free municipal bonds I just mentioned. I have a friend who is a financial planner in New Zealand where managed funds are taxed on capital gains on share portfolios. To me, this is an obstacle to accumulating assets for retirement. Although my friend tells me that the tax regs are being reviewed, it would seem to me that right now actively managed funds might be an inefficient means of investing, at least in that corner of the world.
Mistake #4. Lousy asset allocation. No other way to put it. If you are too conservative an investor, you may not build up enough for retirement. Of course, if you see retirement as the signpost up ahead, and you are in high-risk vehicles, then you could lose whatever you already saved.
Remember, the way you allocate assets is more critical than what you select in a certain assert class. Statistics reveal that an asset mix accounts for as much as 90 percent of growth in wealth. How so? Get some professional help here. Penny-wise, pound-foolish?
Mistake #5. No post-retirement plan. This is vital and many people can't see the forest for the trees, or even the trees. You must determine exactly how much money you will need in retirement and then make up a specific plan for that money. In other words, we're talking expenses versus income here. When you talk about expenses, include everything and build in a rate of inflation. When you talk about income, include every morsel: investments, retirement benefits, pensions, savings, et al. Many people don't even look at tax considerations along with inflation. A huge boo-boo! Inflation has the uncanny ability to reduce your spending power but still continuing tax liabilities.
So, there you are. The big five mistakes. And, it's never too soon to start getting rid of them.
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