Avoid retirement mistakes
For past generations, retirement planning was something of an after-thought, if considered at all. It was simply a case of paying off the family home, tucking away a few shares, bonds and some cash and relying on the safety net provided by the age pension to get by. But in the twenty-first century, this is no longer enough. In fact, industry studies suggest many couples plan to live on more money ($30,000 pa) than the Age Pension currently provides (around $19,000 annually).
So, the implication is, if individuals want to live well in retirement, the responsibility is on them more than ever to start saving as early as possible, establish their retirement goals, to evaluate the myriad of investment options and be aware of the risks involved. At the same time, with this greater investment complexity, it’s also possible for investors to get confused and make mistakes that can affect retirement savings.
List of the 10 biggest mistakes for retirement planning:
1. Failing to plan for your financial future: “Fail to plan, plan to fail” is just so true when it comes to investing today. In fact, the recent ANZ Survey of Adult Financial Literacy in Australia, said only about 37 per cent of adult Australians had worked out how much they needed to save for retirement. Look, the money just won’t appear in your bank account the day you retire and this is where a financial plan is so important.
2. Not having a budget: Put simply, budgeting is the most effective tool there is to get and keep your finances under control. A budget tells you where you money is going, where you can cut back and where you can save. Look, I know there’s no denying cutting back on your spending is difficult when there is so little fat to trim in the first place. But no matter how much you earn, it is a question of taking control of your money. And this means managing your cash flow, which can only be achieved through budgeting.
3. Leave your money in the bank: Sure, the bank is a terrific place for your everyday spending money but it’s no good for your investment money. If you really want to stick with the bank, don’t leave money in it, buy shares in it. Shares (and property for that matter) present more risk than cash and in the early days may actually generate little or even negative returns.
4. Panicking at the first sign of trouble: The road to successful investing is fraught with many obstacles, as share-market investors can attest! The successful investor takes minor setbacks in their stride, remembers not to panic and sticks with the original investment strategy.
5. Chasing historical performances: There are many mistakes investors make, such as falling for the charms of get rich quick schemes, being swept up by media hype about certain investments and miscalculating the level of risk you are comfortable with. What I mean here is being aware of the maxim: the higher the risk, the higher the return. Many people take on more risk than they are comfortable with to make a quick buck. But when the investment falls short, they’re left in a difficult place financially.
6. Timing the market: those thinking of quitting their jobs and jumping into day trading take note. Rather than trying to beat the market, I would advise investors to buy good quality stocks and stick with them for the long term. By the long term, I mean for at least five to seven years – and you’ll be amazed at how quickly your money begins to grow.
7. Not diversifying: Having all your eggs invested in one basket could prove to be risky, especially if that basket topples over (eg share-market October 1987, property market early 1990s and technology shares, April 2000). Spreading your money across asset classes like cash, fixed interest, shares and property can produce more consistent returns over time.
8. Not doing your research: Always research any investment (buying property off the plan, managed investment or new share listing) and find out who is behind it. Undertaking a period of research also gives you time to coolly evaluate an investment that initially looks good but on closer examination might in fact not be appropriate.
9. Investing in tax schemes: When it comes to tax and investment, please be cautious about tax schemes. With any investment scheme, unless you really understand the nature of the investment, don’t do it.
10. Left it too late: Starting young and saving small amounts regularly is the most certain path to financial independence. But at the same time, it’s never too late to start planning for your retirement either. I have clients of all ages – and many older than 55 when they first approach me. The first step is to pay off the mortgage, if you haven’t already done this. This can be achieved by increasing repayments if this is possible. Once the mortgage is cleared, then it’s time to consider other investment options.
One option here is to consider topping up your super through ‘salary sacrificing’. This is a simple strategy where you can rearrange your pay so that your employer pays a proportion of your salary (previously paid in after-tax dollars) to you in pre-tax dollars into your super fund. By investing more money in a super fund you also get exposure to a range of managed investment choices – balanced, capital stable and growth fund options. By doing this you’ll soon find that you are better placed come retirement.
Online source: Article – Your Life Choices, 13th Apr 2012, http://bit.ly/1Zqs8d2.c
