Get The Investment Return You Need By Avoiding These Common Mistakes

When I was a financial advisor, I would regularly get calls from people with nearly nothing invested for retirement, but they were burned out and ready to call it quits. 

I recall one case where a woman in her early 60s had already quit her job. She had about $100,000 in a 401(k), owned her home outright, and had already claimed Social Security, although she was below her full retirement age of 66. 

One hundred thousand dollars may sound like a lot of money, but if you’re retiring in your 60s, you better count on living another 25 years, at least, and perhaps even longer. I realize that most people don’t want to contemplate that, but it’s the prudent way to approach retirement planning.

There was nothing I could do to help that woman manage her assets, and she did not become a client for that reason. The best thing for her would have been finding another source of income to pay her living expenses, so she could delay drawing down from her small retirement account. 

Sadly, there are far too many Americans who are simply getting by in retirement, not enjoying their lives as much as they could be.  

The good news is: Even if you’re like most Americans who didn’t start investing for retirement at age 22 (as we’re endlessly advised to do, regardless of how ridiculous that may be, in practice), you can take steps to shore up your portfolios. 

Here are some financial considerations that may not seem as exciting as tracking market action, but can have a significant impact on your investment outcome. 

Underestimating Retirement Expenses

Forget the old saw about your expenses declining in retirement. Turns out, the reason that often happens is not a good one: People spend less because they no longer have the income to maintain the lifestyle they had while working. 

You don’t want to be that person. Whatever you spend now to maintain a comfortable lifestyle, count on that for your retirement. Save and invest accordingly. 

Also: Many investors, and particularly traders, underestimate the effects of capital gains taxes, as well as other post-retirement income taxes. 

When you include Social Security, required minimum distributions from retirement accounts, as well as any other sources of income, you could be facing a bigger tax bill than you anticipate. 

Overestimating Your Expected Return

Years ago, when I was just getting started in the financial planning business, I met with a woman who had wasn’t happy with portfolios that any advisor had presented to her. She told me her brother had gotten a 17% return on his portfolio the prior year, and she wanted that or better. 

Seventeen percent is certainly a feasible return. But I had no idea how her brother was invested - and neither did she. Was he bragging about one stock that gained 17%? Was he up 17% at one point, but then it fell? Was he rounding up to make the story sound better? Did he own single stocks? Funds? 

Most investors have no idea what their mix of securities is likely to return. They dream up pie-in-the-sky numbers they expect to get, and then shuffle around their holdings in an attempt to generate that return. 

Sadly, that approach often results in a lower return than simply determining the proper allocation and rebalancing at appropriate intervals.

I’m not talking about trading in this case, but rather a portfolio earmarked for your retirement. 

If you want to avoid those two common mistakes, I recommend getting a financial plan done. 

You don’t have to move your money over for an advisor to manage; plenty will do a comprehensive plan for a fee. This will show you how all your assets fit together in your total financial picture, and how you should invest them to create the greatest probability of achieving your financial goals. 

You may actually find that your investments are too risky, meaning they are likely to correct sharply in a downturn. That could put you in a position where you’re cashing out stocks at lows because you need the cash. If you have an allocation designed for you, and you stick to your plan, you’ll find you’re able to manage the market ups and downs much more easily by withdrawing assets trading higher, while giving others some breathing room to appreciate.