After 20 years in the money management business I saw these mistakes all too often. Fortunately, this time, I’m not reciting the mistakes I have made in the past. I certainly made some, but not these. I’ll share those another time.
1 – The biggest and probably most common mistake is not beginning the process soon enough. That doesn’t really sound like a pre-retirement mistake, but sadly when most folks start, it is too late. It is difficult when young to think 40+ years down the road, but you must. Prior to age 40, most are more materialistic than they should be, new homes, fancy cars, kids, college education; it is difficult to find time and money to put away for retirement. I’m generalizing here; but I would guess that most don’t really begin socking it away until in their 40s. That gives them about 20-25 years to reach their retirement goals. When you look at a long-term chart, say 100+ years, and it shows the annualized returns, you have to realize that there are many 15, 20, 25 year periods in that 100+ year data that do not come close to the numbers being presented. Wall Street loves to show you the 120 year returns of small and large caps; sadly, you don’t have 120 years to invest.
2 – Getting aggressive trying to catch up when you realize you are behind. It was always surprising to me when someone in their fifties called and said they are behind in their retirement needs and wants to be put into something more aggressive. That is just as foolish as one can get. Being short of your retirement goals is one thing, but to risk it all on some aggressive strategy is downright dumb. Can I say that? It is nice that you realized your mistake, but making another mistake won't fix it.
3 – Adjusting (usually this means reducing) spending to align with what you have available for retirement. If you did not have a budget during your working years, then now is the time to start. Once your earned income ceases, you can easily calculate how much money you have and what is provided from savings, 401Ks, pensions, social security, etc. At that point, you need to set up a budget to control the depletion of your wealth. And once you do that, don’t forget to adhere to that budget. The act of setting one up doesn’t count. True Story! A pilot called one day and said he had lost half of his pension because of his company’s bankruptcy. He said he owned two airplanes and a hangar at Executive airport between Miami and Fort Lauderdale. Because we were managing his money, I knew what he had for retirement. Let’s just say he was minimally capitalized for retirement. His question was: should I sell one of the airplanes? My answer was: you need to sell both airplanes and the hangar. Never heard from him again.
4 – Realizing late that your company offers a 401k plan with matching contribution. I find this hard to believe but it happens. The other part of this is when they do realize it, they do not make maximum contributions. The most foolish argument I have heard is that they only contribute enough to cover the company’s matching contribution. I told my kids at an early age to maximize their contributions to all income deferral plans like IRAs and 401K plans. If that seemed like a financial stress, then pick out two dinners a week to skip. You MUST do this. You do NOT want to be dependent on anyone or the government.
5 – As you approach retirement; too often it is the first time some start to think they may not have enough money. They have read all the material from the wire houses on retirement needs, etc. and are concerned. There are two things I want to point out here. One is to avoid the tendency to get too conservative. Two, don’t forget to enjoy your retirement. The big question is: do I have enough to retire on? Let’s try some grade school arithmetic first; something that Wall Street will never say. Let’s say you have $1.5M and you need $65K per year in addition to your other retirement income. Divide 1,500,000 by 65,000 and you get 23.07. Ignoring inflation, and if you put the money in your mattress, you have enough for over 23 years. If you are 66, then that gets you to 89. However, you cannot ignore inflation and there will be times you need additional money. But the point is that you should do just fine with more conservative investments. Don’t forget the simple approach. And if you use a financial planner and he/she presents you with a Monte Carlo simulation; please walk away.
Not sure the title of this article is even close to the content; probably 'Hodge Podge of Investor Oversights' would have been better. I realize that I used a lot of generalizations here and probably do not apply to most of you. Finally, if you want to truly help your children financially; tell them you plan on spending every last dime before you die.
Dance with the Trend,
Greg Morris
