Are You Making These Mistakes With Your Retirement Income?
There are so many tools, products, and advisers out there vying for your retirement dollars, not to mention Uncle Sam's hand poised to make a quick grab any time you make a simple mistake, which means retirement planning can seem overwhelming even for the most careful money managers.
Knowing where to put your savings and investments today so they'll provide the retirement income you need in the future is tricky business, and the people available to help you navigate the waters may not have your best interests at heart.
Among the bad advice you might be given are three increasingly common mistakes that can be devastating to your retirement income, exposing you to unnecessary fees and taxes while giving you limited growth and income. Make sure to avoid these errors if you really want to live the retirement of your dreams
1. Not Making the Most of the Magic of Compound Interest
OK, you're not an investment novice, and you know the importance of compound interest. You've probably heard some version of Warren Buffett's quote about the importance of compound interest making him one of the wealthiest men to have ever lived (my favorite version is a young Buffett telling his wife, "Compound interest guarantees I’m going to get rich").1
failing to save and invest enough soon enough is probably the biggest and most costly mistake many investors make
Still, failing to save and invest enough soon enough is probably the biggest and most costly mistake many investors make, so it bears some mention here.
The sooner you get your money to start working for you, the more wealth that money could produce. A single dollar invested for 10 years, earning 5 percent per year, will net you $1.63 at the end of the decade. That same dollar, earning the same rate, but left alone for 30 years, will turn into $4.32. Clearly getting a jump on things early on is in your best interests, and the closer you are to your retirement—the time when your contributions to your savings and investments will come to an end—the more you need to be saving now to make up for lost time.
There's no going back to save and invest before today, but make the most of the time you have by putting as much of your earnings to work for you as you can. The payoff down the road will be substantially greater, so tighten your belt today if you want a retirement that allows to you truly relax and enjoy yourself—and your wealth.
2. Choosing Options That Don't Meet Your Needs
There are tons of investment options out there, and there's no "right" or "best" choice among them, no matter what your commission-based financial adviser might tell you.
There are simply too many variables, from your earnings to your expenses to your saving/investing rate to your house payments, etc., etc., for any single investment vehicle to deliver the optimum results for absolutely everyone.
It's important to plan for your financial future, using your current budget (possibly with some adjustments) and your retirement goals.
Does the 401(k) offered by your employer offer the diversity of investment opportunities you're after? If not you shouldn't feel tied to parking the bulk of your retirement savings there—not when there are other options that might be better suited to your needs.
Do you think the generally lower returns provided by instruments like variable annuities might not be worth the stability these products promise?2 If so, why let a paid adviser sell you on this product? They might be right for some, but that doesn't necessarily make them right for you.
Everyone should have a diversified portfolio, but the degree and type of diversity will change with each individual investor. You need to find the investment instruments and products that make sense for your goals, your risk tolerance, your time to retirement, and other details specific to your situation.
3. Failing to Take Advantage of Your Self-Directed IRA Opportunities
The first mistake—not saving and investing soon enough—can't really be undone, but you can make up for lost time by upping your investment amounts in later years. The second mistake—choosing investment options that aren't specifically suited to your situation—is one that you can correct any time. In fact, there's a little-known retirement savings option that can help you save more and diversify the way you want to—one that has tax advantages
that survive even longer than you do, enabling you to hand off your hard-earned nest egg.
Self-directed IRAs have all of the tax advantages of traditional (or Roth) IRAs, but instead of being actively managed by financial professionals they give you the freedom to invest your money where you want it: in publicly traded securities, in private businesses, in real estate, and more. Instead of relying on other profit-motivated "professionals" to select your investment vehicles for you, or putting your money into retirement accounts where the government severely limits your investment options, self-directed IRAs allow you to build your retirement savings and income where you’re comfortable.
The only tradeoff is that you need to be ready to take active control of your investments, do your own due diligence (or hire a flat-rate financial analyst to take care of due diligence for you), and be ready to navigate the tax rules surrounding withdrawals that—as in all types of IRAs—can cost you significantly if you make a misstep. The institution that houses your IRA will only be making sure your paperwork's in order, charging minimal fees but providing minimal oversight.
For retirement-minded investors who want to take control of their own future, self-directed IRAs are one of the best options. If this sounds like you, continue reading more about this decades-old yet little-known retirement vehicle with a free information kit available here
. Don't make the mistake of letting others take control of your retirement savings for their own benefit—invest yourself, and invest in yourself instead.