An investment strategy for your retirement does not end on the day you retire. In fact, you should be spending more time on your investments once you do retire. Being retired does give you a new perspective on your investments, but it also gives you more of an opportunity to get into trouble. Watch out for these five most common mistakes.
The Annuity Snare
Your 401(k) money is now completely in your control. Annuity salesmen are laying in wait for you, ready to coax you into contracts that promise high returns and low risk, but which deliver nothing but headaches and fees. The answer is for you to wait. Do nothing major with your investments for your first year of retirement except for rolling over the funds into an IRA. At the end of a year, consult with a fee-only financial adviser who will not benefit financially from any advice offered to you.
Do not overspend. You’ll be paying out of your retirement funds for whatever rewards you feel you’ve earned, so live frugally the first two years of your retirement. By that time, you’ll have figured out what is really important to you and what you’ll enjoy most. You need to save for later in retirement. You cannot predict your life situation. You may end up needing to pay expensive medical bills or fees for a nursing home in Ohio or wherever you live.
Retirement will be a period of your life almost as long as your working life. Remember how much things cost when you started your career? And the contrast with the price of things on the day you retired? The same progression of decades-long inflation will occur with your retirement. Your nest egg could lose half its value in 25 years due to inflation. Make sure you factor in inflation.
Safety in Bonds
If your retirement portfolio contains only bonds because you want to play it safe, then your retirement is only half-safe. You need some stocks whose return will counteract inflation. There’s no need to go high-risk, but a small percentage of your portfolio should include some dividend-paying stocks.
Leaving safe conservative bonds out of your portfolio is a mistake in the other direction. Don’t rely on the possible payback of high-risk stocks to finance your retirement. When there’s risk, emotion comes into play. That’s not what you need for an investment strategy. Add bonds to your portfolio.
The process of financial investment does not end on your last day of work; it merely begins anew on the first day of your retirement. Stay aware of these mistakes many people fall into when they retire.