Constructing a smart retirement income plan isnâ€™t easy. Throughout the working years there are many factors to consider, such as salary, expenses â€“ monthly and unforeseen â€“ debt and college for the kids, just to name a few.
All of those can affect a personâ€™s ability to, first, devise a consistent plan for their retirement goals, and secondly, accumulate the necessary capital to provide ample retirement income. Costly mistakes can be made that will have implications down the road.
â€śA retirement strategy has many moving parts, and each can have a significant impact on the others,â€ť said Jadon Newman, CEO of Noble Capital, a financial advisory firm. â€śMany people often make the same mistakes.
â€śThere are ways to avoid them, and much of it is about knowledge. Thereâ€™s more you need to know about retirement today than you did 20 or 30 years ago. It starts with knowing what lifestyle you want to achieve in retirement and the options that will both protect you and enhance what should be the best years of your life.â€ť
Newman gives the following four common mistakes in retirement planning and how to avoid them:
â€˘Investing like youâ€™re still young. Earlier in their working careers, people often have a higher risk tolerance. But approaching retirement, Newman said, your investment strategy should shift toward preserving capital.
â€śPhase out those investments that are subject to wider fluctuations,â€ť Newman said. â€śThe gradual move away from riskier investments should begin as you enter your mid to late 40s.â€ť
â€˘Leaving your nest egg vulnerable to big market drops. Putting your entire nest egg in one basket could be disastrous.
â€śHaving an excessive amount of market risk in your portfolio, you could find yourself suffering a loss that you wonâ€™t have time to recover from before you retire,â€ť Newman said. â€śWith stocks having surged for an extended period, beware the bear market. It would be wise to purge some risk from your portfolio in favor of more predictable methods of capital growth and income, such as annuities, life insurance policies, or alternative investments like private lending and real estate.â€ť
â€˘Not satisfying basic income needs. It has become less realistic for a 401(k) coupled with Social Security to provide the regular income needed for retirement. Itâ€™s important to estimate what yearly expenses will be in retirement and diversify accordingly.
â€śUse your investments, insurance policies or retirement accounts to provide multiple income streams,â€ť Newman said. â€śThis allows you to draw from them only what you need to meet your pre-determined budget. Be sure you calculate your Social Security payment and any required minimum distributions so you donâ€™t incur additional tax liability.â€ť
â€˘Having the wrong kind of annuity. A crucial component of a comfortable retirement is reliable income, and a common way to achieve that is by using annuities. Some retirees find themselves with an annuity that doesnâ€™t fit their needs. A fixed annuity pays out a guaranteed rate of return, providing less risk compared to variable annuities, but the tradeoff is you get a more modest return.
â€śSometimes a fixed index annuity (FIA) is the best bet,â€ť Newman said. â€śThese allow you to protect your principal by shifting the risk to the insurance company selling you the annuity. There are caps on your potential returns, but FIAs are more reliable because they mitigate risk.
â€śWith retirement planning, the end goal should be not only to ensure youâ€™ll have enough income to satisfy your retirement budget, but also to provide you with enough to truly enjoy your retirement,â€ť Newman said. â€śBecause life goals and the economic climate are subject to change, you need to consult with your financial adviser annually to optimize your strategy.â€ť
Jadon Newman is founder and CEO of Noble Capital.He specializes in retirement planning, real estate investment, and asset management.