In last Friday’s article I talked about reasons when it might be a good idea to switch retirement investments. Today I’m going to take things a step further cover 7 retirement traps that can destroy your golden years and share some of the things I’ve seen over the years working in financial services.
I also want to share these because they are things I want to avoid as I’m in the process of switching out of my current retirement account and into something that fits my objectives a little better. As you may have read in my last article I have really crummy retirement account right now and this is one area I haven’t been so strong with in my finances.
As a result I’m also doing this to point out the things I don’t want have happen with my retirement account and hopefully correct these before things get any worse.
Not Saving Soon Enough
One of the first traps I don’t want to become a victim of is not starting soon enough. I actually started saving back in my early 20’s but I stopped after three years when I got married.
The problem with this is that it will mean less in my retirement fund when I actually go to retire. Now this doesn’t go to say that I’m not saving anything because I still have my work retirement plan yet.
The other problem with this is that it delays the compounding effect with the money I could have been putting in my account. For example, if I were to start saving for retirement at the age of 20, earn an average return of 10%, and retire at the age of 65, I would end up with $1,048,338.
However if I were to wait till I was 40 to start saving I would only end up with $132,695 in my retirement account. The difference can be catastrophic so start as soon as you can.
Getting To Risky
Another trap to avoid is getting too risky with your retirement funds. Small cap funds, international funds, and speculative investments are very risky. While working in financial service I once seen a lady who had all of her money invested in REIT Fund also known as a Real Estate Investment Trust. What’s worse is it was 2008, the year of the huge real estate bubble popped.
Thankfully this lady was able to move her money before any real damage was done but when it comes to investmenting your money put no more than 20% into high risk investments and as you get older this number should shrink.
The same also goes for being to conservative with your investments. In order to retire with enough money you need to achieve average returns above an 8% return. Returns lower than this will leave you short with retirement cash.
Going back to my example in trap number one if I were to only earn a 4% return I would’ve only around $151,000 over 45 years versus over $1,000,000 if we were to earn a 10% return.
This means if you want to have a retirement you will need to take some risk in order earn enough money to retire on, unless you can afford to contribute more money to your retirement but for most this just isn’t the case.
Fourth on the list is high fees. When you’re investing for yourself you need to be aware of what kind of fees brokers are charging you. Typical mutual fund fees include an initial sales charge, annual fees, and even junk fees such as 12b-1 fees.
I talked about these fees in my last article but the important thing to know is that not all companies have the same fees. For example American Funds has around a 5.75% initial sales charge with an annual fee of 0.75%.
On the other hand you have companies such as Vanguard who have a 0% sales charge and only charge an annual fee around 0.30%. This could have a huge difference on your retirement account. To learn more on how the fees in your retirement fund might cost you check out this great tool from FINRA.
Another issue I want to avoid is not having any control. Losing control can come in many forms such as fees that hold your account hostage as they have in my case. With my current retirement account set up in an annuity it has a surrender penalty tied to it that won’t allow me to move the money until the penalty is up.
Another way to lose control is not knowing where you should be investing your money. Unfortunately, most investment companies don’t make this easy for them to evaluate their retirement funds except with a quarterly statement.
In my next article I will show you a few companies I’m considering to move my retirement account to that will give me the control to watch my investments much more closely.
Invest Too Heavily Into One Thing
Sixth on the list of retirement traps is investing to heavily in one thing. The most common investment I see people doing this with is gold. While gold might be a very valuable asset it is also an investment that can fluctuate on a very radical basis.
This can go for any other investment as well. Putting all of your eggs into one basket is always a bad idea and one that you should consider staying away from.
If you want to invest in gold do it separately on the side of your retirement accounts then if you actually do lose money it won’t be as big a deal.
Giving Into Emotion
Finally, the last big trap to avoid is buying on emotion. In 2008 the markets took a big hit and people lost thousands and in some cases millions due to the fact that they got to emotionally tied to what was going on.
A good example of this is pulling your money out of your retirement account when you’ve already taken a hit on your account. The reason this isn’t a good idea is because when you pull your money out you’ve permanently taken the lose.
Whereas if you would have stuck with it you may have lost money for the time being but you would still have the same amount of shares. The other added benefit is that you would be buying shares at a discount so when the market does rebound you should see some big time gains.
How about you, have you ever fallen for any of these retirement traps?