As you enter your 50s, your retirement years become much clearer. After spending years building assets and contributing to your retirement funds, it is time to put your plan into action. With only a few years left to make contributions, this is not the time for poor money management or financial decisions. This is especially true when it comes to your investment portfolio. Here are some of the most common investing mistakes to avoid after turning 50 and help you enjoy your golden years.
7 Investing Mistakes to Avoid before Retirement
1. Being Too Conservative
Adopting a more conservative strategy is a good way to minimize risk and market exposure as you near retirement. Money allocation and diversification of assets become even more important as life expectancy increases. A longer life means your assets have even more time to grow. However, if your portfolio returns do not keep pace with inflation rates, you decrease your capital’s purchasing power over time.
Despite the possibility of high returns through equities, many small investors still opt for low risk investments. This is especially true when there is no longer a steady income stream. Keep in mind that bailing too early from the stock market could be harmful to your financial health. While the stock markets are volatile, they also generate high returns in the long-term. These returns will protect your and your investments against longevity risk. You need to carefully weigh the risks and rewards of your current strategy to ensure your retirement funds will sustain your lifestyle for the years ahead.
2. Not Utilizing Employer’s Retirement Plans
One of the greatest benefits employers offer are company retirement plans. You don’t want to miss out on these additional funds if your benefits package includes matching contributions to your 401K. You can view these contributions as a way to protect your hard-earned money from market fluctuations. If you suffer losses during a downturn, the additional funds provide a buffer until the market recovers. You should also consider making catch-up contributions if you had a late start in the investing game. You could be missing out on significant gains if you are waiting for the right moment to invest.
3. Mismatched Investments
Other major investing mistakes to avoid after turning 50 are choosing the wrong investments. You need to consider if your investment strategy or product is the best vehicle to help you reach your financial goals. Your portfolio should also reflect your income needs, health costs, taxes, inheritance, and risk tolerance after retirement.
You want to avoid the pitfalls of short-sightedness as you prepare your income replacement strategy. If you take on too much risk, buy illiquid securities, or pay too much in variable annuities, you could be hindering your portfolio’s growth. If your investments don’t perform as predicted, you may also have to delay your retirement. Financial advisors tell you to focus on the total return rather than your portfolio’s current yield. This means you should look at both the income and capital appreciation of your investments. It is important to balance both growth and risk as you prepare to transition out of the work force.
4. Dipping into Your Retirement Funds Early
This is one of the biggest investing mistakes to avoid after turning 50. You may be tempted to access your retirement funds if you find yourself in a tight financial spot. Although it may seem wise, you should think carefully and weigh the outcomes. In addition to the tax consequences of taking withdrawals, you also interrupt the power of compounding. Financial advisors suggest leaving your funds untouched for as long as possible. This ensures that you can achieve maximum growth on your investments.
5. Going into Autopilot Mode
Another huge mistake many people make is not monitoring their investments after they retire. Even if you have steadily contributed to your retirement funds over the years, you cannot turn a blind eye to them. It is easy to switch to autopilot and assume that your portfolio will maintain current yields.
However, this mindset can be very dangerous once you no longer make regular contributions. The markets’ highs and lows have a greater impact when you are living on a fixed income. Furthermore, these losses can become even more problematic when you are regularly withdrawing from your accounts. This situation is exacerbated even further if you have not accounted for increased taxation and inflation rates. Evaluating and adjusting your strategy when needed is crucial to ensure that you don’t outlive your retirement funds.
6. Accruing or Maintaining Debt
In a perfect world, everyone would be able to eliminate all their debts before retiring. However this is not always an option for people paying off a mortgage, credit card debt, or loans. Even if you cannot completely eliminate your debt, it is a good idea to aggressively attack it when you reach your 50s. You want to be well prepared for any health issues or economic downturns that might disrupt your plans.
Moreover, it is also important not to accrue any new debts once you formally retire. This incorporates living within your means, not falling prey to scammers, and not lending to everyone who asks. Although you may be tempted to lend to friends or family members in need, you should really consider your financial security and terms of repayment before agreeing to anything. In the end, you must ensure that you will be well cared for in your later years.
7. Retiring Too Soon
Early retirement is an idyllic goal for many of us. However, retiring too soon is another investing mistake to avoid after turning 50. It could jeopardize your future security. Not only do you miss out on additional income, but there are also emotional and psychological effects to consider. Many retirees find themselves bored, depressed, and unfulfilled since they feel they feel they lack purpose. For these reasons, some choose to return to the workforce. Unfortunately, re-entering the job market after 55 can be extremely challenging.
Instead of opting for early retirement, consider making a slower transition into retirement. This could translate to reduced hours or a flexible contract. Easing your way into retirement gives you more time to make contributions and adjust to life on a fixed income.