Fiduciary financial advisor help clients achieve their financial goals and ensure a safe path to retirement. They often encounter issues, which if not resolved on time, can impose serious threats to meeting these critical life objectives. In this article, I would like to share my experience and guide you through some of the major mistakes in personal retirement planning.
Complacency is one of the worst enemies when planning for retirement. Feeling that you are all set and do not need to change anything can cause you many headaches in the future. We all have blind spots. Taking a second look will help you see some of the threats to your long-term plan that you may not have noticed earlier.
Many of us are afraid to ask the tough questions. “Am I on the right track?” “What is my risk tolerance?” “Is my advisor working in my best interest?” These are just a few of the questions you can try to find the answer to. While the truth might be harsh, addressing these issues sooner rather than later is critical.
Some folks are completely relying on a single source of income for their retirement, being that Social Security, a work pension or a 401(k) plan. With Social Security running out of money and many pension plans shutting down or running a huge deficit, the burden will be on ourselves to provide us with reliable income during retirement years. (For related reading, see: 3 Reasons Your 401(k) Is Not Enough.)
According to a recent article by the Chicago Tribune, only 18% of the people feel confident that have enough money saved for retirement. That is a scary number. It means that 82% of the U.S. population is not prepared financially for retirement. They will not have enough funds to replace their current income when they retire.
One common problem in client portfolios is the mismatch between investment allocation and personal goals and risk tolerance. Portfolios that are either too aggressive or too conservative or sometimes just hold too much cash. Aligning your investments and retirement savings with your goals will ensure you are taking the right amount of risk to make them happen. (For related reading, see: Safety, Income and the Optimal Portfolio.)
Another common problem among clients is the lack of diversification. Many portfolios are heavily invested in a single asset class, a target retirement fund or an index fund. Diversification is the only free lunch you can get in investing and will help decrease the overall risk of your portfolio.
Owning too much of one stock or a fund can cause significant issues to your retirement savings. Just ask the folks who worked for Enron or Lehman Brothers and had their company stocks in their retirement plans. Their lifetime savings were wiped out overnight when these companies filed for bankruptcy.
Regular rebalancing ensures that your portfolio stays within your risk tolerance level. While tempting to keep an asset class that has been on the rise, not rebalancing to your original target allocation can significantly increase the risk of your investments. (For related reading, see: Rebalancing Your Portfolio to Stay on Track.)
Paying high fees for mutual funds or even a financial advisor can eat up a lot of your return. It is crucial to invest in funds that can produce superior returns after fees. If you own a fund that has consistently underperformed its peers net of fees, you probably should not be in that fund. Similarly, paying fees to a financial advisor should bring you a bigger value than what you would have achieved on your own.
Technology in our age is incredible and developing fast. However, we are humans, and phone apps and web tools can’t answer all our questions. They might give you a good guideline but cannot capture all aspects of your life.
Long-term investing will produce gains, and many of these gains will be taxable. As you grow your retirement savings the complexity of assets will increase. And therefore the tax impact of using your investment portfolio for retirement income can be substantial. Building a long-term strategy with a focus on taxes can optimize your after-tax returns when you liquidate your investments.
Many people want to leave some legacy behind them. Building a robust estate plan will make that happen. Whether you want to leave something to your children or grandchildren or make a large contribution to your favorite foundation, estate and financial planning is important to secure your best interests and maximize the benefits for yourself and your beneficiaries. (For related reading, see: Estate Planning: Which Assets Are Best to Leave Your Family?)
Good exit planning is especially critical for business or real estate owners who want to use their accumulated assets for financing their retirement. Unlike liquid investments in stocks and bonds, corporations and real estate are a lot harder to divest and doing may have serious tax and legal consequences. Having a solid exit plan will ensure the smooth transition of ownership, business continuity and optimized tax impact.
Between our family life, friends, personal interests and causes, job, real estate properties, retirement portfolio, insurance and so on, our lives become a complex web of interconnected relationships. Above all is you as the primary driver of your fortune. Putting all elements together and building a comprehensive picture of your financial life will help you manage these relationships in the best possible way.
Some people are very self-driven and do very well by managing their own retirement. Others who are occupied with their career or family may not have the time or ability to deal with the complexities of financial planning. Seek help from a fiduciary financial advisor. These folks will keep you on track, watch out for your blind spots and help you meet your personal and financial goals.
(For more from this author, see: Financial Planning Tips for Small Business Owners.)
The content of this article is a sole view of the author and Babylon Wealth Management, fee-only Registered Investment Advisor in the state of California. The opinion and information provided are only valid at the time of publishing of this article. The material contained in this article is provided solely for information purposes only and does not constitute investment, legal, or tax advice, nor is it an offer to sell or a solicitation to buy any investment, investment process, strategy, or advice. It has been prepared without regard to the individual circumstances and objectives of persons who read it and may not be suitable for all individuals. Babylon Wealth Management encourages individuals to seek the advice of a professional advisor. The appropriateness of the particular advice, investment, or another strategy depends on a person’s or entities individual or specific circumstances. Past performance does not guarantee future results. Various sources may provide different historical figures due to variations in methodology and timing.
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