Avoid These Mistakes With Your Retirement
Introduction
A lifetime of saving for your retirement can be easily thwarted by making some of the common mistakes listed below. Many people rely on their gut instincts or perceived knowledge of the markets to make retirement decisions. It is our goal, at AlphaMark Advisors, to ensure our clients can enjoy their retirement comfortably and without worry. No one can predict the future, a guaranteed plan is only as good as the person or institution making the guarantee, and as we all know, there are no free lunches. Successful retirement planning requires defining one’s appetite for risk, one’s financial goals and expectations and implementing those two things in a well-conceived plan that will be followed with discipline. A good start to creating an effective plan is working with a professional that has the appropriate experience and credentials, such as the CFP or CFA designations. In addition, you should be on the lookout to avoid these common mistakes.
Taking Too Much Risk
Risk comes in many forms. Some investors prefer to let their allegiance to their employer create an undue amount of risk by keeping their retirement portfolio over-weighted in the employer’s stock. The rationale is based on the fact that their wealth was created by the company stock, so why not keep it there? All one has to do is ask the previous employees of Tyco, Enron or even Fifth Third Bank what happens to an overly concentrated portfolio. The first two examples were complete wipeouts of wealth and the third example shows how a stock can go from $65 a share all the way down to $1.02 per share. Now, Fifth Third stock has recovered somewhat, but only to the high $20’s. Any holding that is more than 3% of your portfolio is a risk, unless it is a diversified mutual fund. Also, having too large of a concentration towards stocks is also a risk when one is in retirement or close to retirement. For example, from years 2000 to 2010, the stock market returned 0% while bonds produced returns of 4% to 6%. A diversified portfolio has elements of both stocks and bonds depending on your needs.
Not Taking Enough Risk
A portfolio of only bonds is sufficient if the income needs for the individual are at 50% or less of the income generated by the bond portfolio. Because a bond’s value moves based on inflation and inflation expectations, the spending power of a person’s fixed income erodes. Stocks are added to a portfolio to increase the returns of a portfolio to offset the effects of inflation. We all know that $100 today will not be able to buy the same amount of food, travel and clothing 10 years from now. In fact, to keep up your lifestyle, you will need to draw a larger percent from your portfolio to keep up with the effects of inflation. As that happens, you run the risk of depleting your portfolio and having nothing left. A good plan will factor in all of the goals and expectations to create a well-diversified portfolio that meets your needs while maintaining a risk profile that you are comfortable with.
Paying Excessive Fees
Many advisors charge management fees that are too high. Competitive management fees should average between 0.75% and 1.25%. There are various ways that brokers, who act as advisors, earn their fees. These range from commissions, 12b1 fees and a percentage of assets managed. It is important to know what fees you are paying to your advisor. If you are paying an extra 1% that is buried in various products, you may be paying too much. 1% extra, compounded over 25 years, on a $1 million portfolio equates to $280,000 in fees. Keep this in mind when you are working with an advisor. Know your “All-In Fees.”
Taking Advice From Television Shows
One of the most popular pundits on TV is Jim Cramer on CNBC. Mr. Cramer was a successful hedge fund manager and has been promoted as an expert on CNBC. He is, no doubt, knowledgeable and capable of providing good advice. The problem with this approach is that the markets are ever changing. Unless you are truly engaged with the markets and are willing to make immediate changes based on those dynamics, following “one-off” advice from a TV personality is paramount to gambling. In addition, these shows are somewhat for entertainment. Do you really want to trust your retirement nest egg to a guy that blasts horns and makes crazy noises throughout his show? These types of recommendations are only as good as the day that they were recommended. Not often do the shows come back and review what has been recommended. In addition, there is a popular segment called, “Am I Diversified?” This segment could lead investors to believe they are diversified with only 5 stocks that may be uncorrelated. That is completely reckless and dangerous. As we have previously stated, no holding should be more than 3% of your portfolio unless you want to take excessive risks. In summary, watch the shows for some information and some entertainment. However, treat your life’s savings with more respect.
Timing the Market
This section should be retitled, “Trying to Tame the Market.” It is impossible to know what the market will do on a day-to-day basis. In the fall of 2008, the market dropped close to 10% one day and went back up the next day by close to the same amount. This is an extreme example, but one that could happen again. Imagine if you sold at the loss of 10% that day only to realize that 10% was recovered the very next day. You would not have had time to buy back in the morning, because the market had already moved. In the most recent edition of his book on investing, Mark Hebner and his staff at IFA put together opportunity costs related to distinct market-timing objectives. As he notes, avoiding big sell-offs can be alluring. “The predicament, however, is that the worst days are equally concentrated and just as difficult to identify in advance as the best days,” Hebner writes. Missing the 40 worst days in the S&P 500 Index during a 20-year period (1998-2017) would’ve increased investment returns by 952% as compared to a buy-and-hold investor’s gains. By contrast, investors who weren’t on the right side of trades in both instances–jumping in and out–faced even more damage. The flip side of the coin is that missing out on 40 of blue-chip stocks’ best days would’ve resulted in a triple-digit percentage loss during this extended timeframe.
Buying So-Called Guaranteed Annuities
Annuities sound great on the surface. A guaranteed income for a set time period, or even life. The insurance companies know what your life expectancy is, and base your payouts on that. They do not have a secret formula to invest in some magical markets that produce returns greater than exist in reality. In addition, that guarantee is only as good as the company guaranteeing it. Think about it, are you willing to hand over your life’s savings and in return get a piece of paper, a contract, that “guarantees” you income? Too many people pay excessive fees to the insurance companies. Annuities are not all bad. In certain circumstances there can be a reason to use an annuity, but it is generally after all other options have been exhausted. In addition, because annuities are tax-deferred, it rarely, if ever, makes sense to own an annuity inside of an IRA. IRA’s are already tax-deferred. It is a sure sign that you may have been the victim of an overzealous broker who just earned a fat 5% commission on your hard-saved retirement. Lastly, think about this…. You can pay yourself an annuity without taking any risks. Put your money in a savings account. Let’s say its $100,000. You can pay yourself 5% a year for 20 years. That’s right, $5,000 a year for 20 years. It is not magical; it really comes down to the simple math: $100,000 divided by 20 = $5,000. This is what the insurance companies are selling you!
Unrealistic Retirement Withdrawals
Mistakes of this nature happen in two categories. The first category is having a well-defined budget and expectations. This budget should include amounts for unexpected expenses and even longer-term items such as replacing a car or the roof on your home. Many individuals draw 4% to 5% on their portfolios, only to have an unexpected expense happen. Then, they tap their retirement portfolio for this extra cash. The problem arises as these withdrawals may happen at the worst times, when the market is down. At this point, you have compounded the loss of earning power of your portfolio when you withdraw during these time periods. The second common mistake is to draw out more of your portfolio when returns are good. Unfortunately, this too, is a huge mistake. The market has good years and bad years. The good years offset the bad years. If you draw off the excess returns during the good years, your portfolio is left with bad years and average years which averages out to less than average years. Over the last 20 years we have seen two devastating bear markets. At AlphaMark Advisors, we have consistently advised our clients to keep their withdrawals to 3% to 5%, with 5% being on the risky side. We are happy to say, that our clients that have been with us since 1999 and have followed our advice, have been able to draw off of their portfolios for 20 years and have more money today than when they retired. That should be your strategy as well.
In Conclusion
Our goal in sharing these mistakes is to help you make wise choices regarding your retirement. We also wanted to give you some insight into how we take care of our clients at AlphaMark Advisors. Just as you would not perform your own medical diagnosis, but rather seek out the help of a doctor, we feel it is imperative for any investor to meet with a professional who can help them navigate the ever changing dynamics of the markets and how that relates to their retirement.
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