Are There Only Five?
What if I make just one mistake? There are more than five mistakes that can have significant negative effects on your retirement. Ten would be more all-inclusive, but I want to share the mistakes I have seen in the last twelve months in working with friends who ask me for advice or help. If you make even one of the five mistakes, you are probably going to wish you had acted differently when you arrive at your retirement party. Perhaps the problem will only get worse as you get older. I suspect it will. The following are not in any specific order. However, some have more of a multiplying impact on your success. The power of time when investing is often ignored.
First Mistake is Misuse of the Retirement Funds
You might find it surprising that early withdrawals or loans from your 401(k), IRA, ROTH, or other retirement accounts is a mistake. Early withdrawals are a double-blow. You will likely pay a ten percent penalty if you are less than 59.5 years old. There are exceptions, but don’t be overly smug if you fall into the exception category. For both early withdrawals and loans, you are greatly diminishing the power of the multiplication of your assets over time. Even if you pay your loan back, you are likely paying at a reduced rate that is less than you would have earned had you stayed invested. Bear in mind that there are rules to contribute to an IRA or ROTH. If you withdraw funds, you still have to have earnings from working to put money back into the fund. Catching up is often impossible.
Second Mistake is Target Date Funds
Target Date Funds are easy to spot. They always have a target year in the fund name. For example, someone who plans to retire in 2040 might invest in the “T. Rowe Price Target 2040 Fund.” The ticker symbol for this fund is TRHRX. On the surface this makes sense. Some experts have built the fund to reduce your risk as you get closer to the 2040 retirement date. However, there are huge flaws in every target date fund I have reviewed. They underperform and overcharge for the expert management results of the fund.
First of all, it is hard to see what you own. Target date funds usually have other funds inside of them. To know what your TRHRX investments are you would have to drill into more than ten other T. Rowe Price Funds. Furthermore, to make matters worse, the fund today is about 22% invested in cash and bonds. If you examine just about any good bond fund, you will find it has performed poorly over any ten-year period. The five-year return of TRHRX bears this out. The fund has grown by 35% in five years. That is a terrible five-year return. A good five-year return would be around 90%. Finally, to own TRHRX, you have to pay them 0.59% every year for their poor performance.
Third Mistake is High-Cost Funds
High-Cost investments are wonderful for mutual fund companies and for many brokers. They make a percentage of your total account balance and that can vary by investment. As a general rule, paying more than 0.10% for any investment is paying too much. There are certainly exceptions, but they are rare. It isn’t uncommon for an employer to offer some Vanguard mutual funds along with other more expensive funds. Ninety-nine times out of one hundred, you are better off with a Vanguard fund. They often charge much less than 0.10%. Bear in mind that the cost may seem low when you have ten thousand dollars, but they can be significant when you have $500,000 in your retirement account. One word of caution: even a Vanguard Bond Fund is probably something most investors should avoid. Bonds just don’t keep up with inflation.
Fourth Mistake is a Failure to Consolidate
It isn’t uncommon for most working adults to have more than one employer over the course of a thirty-year career. Of course, that is true if you work for 40 or 50 years as well. If you keep your previous employer 401(k) or other similar retirement assets in the same place after you leave your employer, you are making a mistake. You might at first think this isn’t a big deal if you haven’t made any of the first three mistakes. However, employer plans offer very limited choices. If you move to your own self-directed IRA or ROTH IRA, you can pick some better solutions from a huge array of funds. This also opens up opportunities to be more particular about a dividend growth discipline. Remember, when you are in retirement, you will probably need income. Don’t make the mistake of buying bonds or annuities to provide the income. Rather, find solutions like DGRO (iShares Core Dividend Growth ETF) to give you more income year-after-year.
Remember my TRHRX example? That fund has grown 35% in the past five years. DGRO has grown 78% and pays dividends. DGRO’s expense ratio is 0.08%.
Fifth Mistake is a Failure to Set a Goal
It should not be surprising that most people do not have a goal or goals regarding retirement. Therefore, they probably don’t have a plan. If they have a plan, it will dictate the results.
A recent AAII Journal article highlighted the questions that each person should ask, or the decisions that should be made when then start the journey that will probably lead to the end of their working lives. The questions are, what is the goal, when will it be achieved, how long will it last, how costly will it be, and what is the priority of the goal or goals?
Goal Setting Questions
I won’t go into great detail about goal setting or planning steps. However, can you answer the following questions with conviction and with something you can measure? 1) What is your goal and what are your primary reasons for saving and investing? 2) Is there a point where you will be spending some of what you have saved? Perhaps it is for college expenses for children, for a major purchase, or for annual income in retirement? 3) How long does the money have to last? While we never know how long we might live, many outlive their resources. Some live a long time and have to try to work well into the years when working is very difficult. 4) What are the future costs that aren’t apparent on the surface? Have you considered income taxes, inflation, and the different needs and services you will require as you age? 5) Is your goal a true priority or just a nice-to-have? Is your goal realistic based on your current income and behaviors?
If you need help, I offer free help to those who ask for help. Obviously, it is first-come first served. However, I can often give someone who comes to me some action steps that can make a big difference in their long-term success. I won’t sell you anything and I won’t give you advice that I don’t follow myself.