Retirement Investing Mistakes That Can Cost You Thousands

Retirement planning is not only about building a financial balance. Australian investors also need to consider inflation, investment risk, superannuation, diversification and how their financial demands can change over time. Decisions made years before retirement might affect the income available in retirement and mistakes made in retirement can put strain on savings.

The key to successful retirement investing is knowing what you’ll need financially over the long term and choosing choices that fit your situation. Some typical mistakes are easy to miss. For example, many people underestimate living costs, hoard too much cash or take investing risks without thinking when they will need the money. Early identification of these problems can help investors develop a more systematic approach to retirement planning.

1. Starting Retirement Planning Too Late

The biggest mistake in retirement investing is to procrastinate. People may decide to pay down their mortgage, household bills, education expenditures or other financial obligations, putting off retirement funds until later in their working careers.

Starting earlier allows more time to build savings and investment returns. Compounding is the process of earning returns on your initial investment and earlier returns. While it’s never assured, this influence can make a considerable difference to portfolio growth over the long term.

For example, someone who begins to make regular contributions in their 30s usually has more time to build up retirement funds than someone who begins in their 50s. A later start doesn’t mean retirement planning is a waste of time, but it could mean bigger contributions, different expectations or a closer examination of future needs.

Having a realistic plan for saving and looking at it periodically can help people stick to it, rather than depending on substantial payments close to retirement.

2. Underestimating Retirement Expenses

Spending in retirement can be very different than spending while you’re working. When people stop working, some costs may fall but others can remain high or grow. A retirement budget might be affected by healthcare, insurance, house upkeep, travel and support for family members.
If you underestimate these fees, you may take more from your investments than you mean to. If you remove a lot while markets are down, your portfolio may have less funds to invest when markets rebound.

It’s a good place to start to split out essential costs – housing, energy and food – from optional costs such as holidays and entertainments. Investors can then estimate how much income they could need each year and think about what role superannuation, other investments and eligible government subsidies might play.

As conditions change, these estimations need to be re-visited. Inflation, health demands and changes in home arrangements might affect the amount needed to live comfortably.

3. Ignoring Inflation When Setting Retirement Goals

Inflation slowly erodes the purchasing power of money. Today, an amount that comfortably covers everyday expenses may not afford the same lifestyle decades down the road. 
This means that retirement investment savings goals should be based on rising costs, not just current prices. Keeping all your money in cash is stable and easy to get to, but after tax, cash returns might not always keep pace with inflation.

Investors can see how different asset types could fit within their longer-term goals. Shares and other growth investments may give prospects for capital expansion. Cash and fixed income assets may be used for various reasons in a portfolio. Each has its own hazards, and the right mix depends on the investor’s time horizon, income demands and tolerance for swings in the market.

The point is not to get rid of inflation risk completely, but to be aware of it while projecting future spending and determining how to distribute retirement funds.

4. Taking Too Much or Too Little Investment Risk

Some investors assume more risk than they should in an effort to grow retirement funds rapidly. Putting too much money into one firm, sector or speculative investment might put savings at risk of serious losses. This can be especially challenging to handle as retirement approaches or after withdrawals have started.

There may be a separate problem in avoiding growth assets altogether. If your portfolio is overly cautious, it might not sustain your expenses for a long retirement -- especially if inflation keeps driving the cost of living up.

Risk management is the balancing act between wanting to grow, and needing to protect capital and have access to cash when needed. However, when retirement nears, investors may review their asset mix and there’s no one-size-fits-all allocation. Other sources of income, financial commitments and personal circumstances are all relevant, as is the expected length of retirement.

5. Overlooking Superannuation Options and Fees

Superannuation is a vital component of retirement planning in Australia, although some individuals seldom examine their fund, investment choice or account fees. Others may have more than one superannuation account, each with its own administration or investment expenses.

The fees might eat away at what you have left to invest and grow over time. Even slight variances in annual costs can add up to a significant difference over a long investment horizon.

Investors can look at their superannuation statements, compare investment options and understand the fees and insurance arrangements related to their funds. They should also review if their investment option is appropriate when their circumstances change.

6. Failing to Diversify Retirement Investments

A concentration of a portfolio on one asset class or a few investments might enhance exposure to specific risks. For example, a portfolio with a large exposure to Australian shares may be affected by local economic conditions and sector concentration, whereas a property-heavy portfolio may be affected by liquidity and changes to property values.

Diversification is the allocation of investments across diverse assets, industry, enterprises or geographic locations. It can’t stop losses, but it can soften the blow of bad performance in one area on the whole portfolio.

Liquidity As you approach retirement, investors need to think about liquidity: how easily can you turn assets into cash when you need it? Money that needs to be readily available soon enough may not be appropriate for long-term attractive investments.

A portfolio should have a variety of investments, but it should also be aligned with the investor’s goals, planned withdrawals and capacity to withstand swings.

7. Withdrawing Retirement Savings Without a Clear Plan

When retirement arrives, investors have a new challenge: translating accumulated savings into income. If you take out too much too soon, you may lower the amount of capital available to you in the later years of your retirement, especially if there is a market slump in the early years of your retirement. 

A withdrawal strategy should incorporate some ongoing living needs, other income sources, financial reserves and the potential for a lengthy retirement. It should also cover emergencies such as medical care and home repairs.

Investors may need to examine withdrawals occasionally, rather than assume the same amount will be appropriate forever. Changes in your personal situation, inflation, and how the market performs can all affect how long your savings may endure.

Risk Considerations

When you invest for retirement you are taking on market risk, inflation risk, longevity risk and liquidity risk. The value of investments may fall as well as rise and you may not get back your original investment. Superannuation rules, fees, tax treatment and eligibility for government subsidies may also affect retirement outcomes. Investors should consider their own financial situation, future income demands and loss tolerance before making any decisions. Professional financial counsel may be helpful when retirement choices entail significant personal or tax issues.

Disclaimer:

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