Because it is impossible to prepare for the unknown, it isn’t realistic to expect anyone to perfectly plan for retirement. However, an article by Kelly Campbell of U.S. News and World Report highlights 5 common mistakes that one can avoid when planning for the future.
1. Absence of a Financial Plan
It’s hard to see very far into the future. Although one may be able to see five or 10 years down the road, it is harder to anticipate 20 or 30 years out, which is the average amount of years that people spend in retirement. Due to this shortsightedness, a financial plan can help one see how the decisions they make today will affect their life perhaps 25 years later.
2. Investing in Bonds
Despite individuals finding prosperity in the 30-year bull market for bonds from 1980 to 2010, the current economic environment may bode poorly for bond investments. Due to significantly low interest rates, bonds are currently priced very highly. However, when interest rates begin to increase, people holding bonds could potentially lose a significant amount of their value.
3. Long-Term Care Insurance
With health costs continuing to reach all-time highs with each passing day, Campbell advises retirees to refrain from purchasing costly long-term insurance and instead perhaps start a “long-term care fund”. Although everyone wants to be prepared for the worst, costs for long-term care insurance premiums have spiked by 40 to 100 percent. And as more baby boomers retire, we could see additional rate increases.
4. Not Preparing for a Market Decline
One huge mistake you can make is not preparing for a market downturn. If nearing retirement, you must think about how you’re protecting your portfolio. Consider: If you have a $1 million portfolio and happen lose 50% while also taking out 4% each year for income, you would need a 117% return to break even. It is easy to chase returns, however the risk is great. This is why a well-diversified portfolio that consists of non-correlating asset classes is a reliable method of preparing against market crashes.
5. The Four Key Personal Economic Factors
The four important factors that everyone must consider for retirement are: rate of return on investments, inflation rates, tax rates and personal expenditures. Of all these factors, there is only one that we can control. We cannot control inflation or taxes and we would like to believe we can control rate of return, however expenditure is the one factor that we can manage directly. Although there may be unexpected expenses, having an understanding of how much one spends can assist when making tough financial decisions.
Tags: bonds, financial plan, kelly campbell, long-term care fund, portfolio, us news
