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Four Commonsense Mistakes That Can Derail Your Retirement


Although you may implicitly know some of the best practices for retirement planning, investors too often go against commonsense decisions and make mistakes that hurt their retirement savings.

Part of the reason why people go against common sense is that they lack a solid financial plan that allows them to stay on course through the ups and downs of trying to reach a savings goal. Instead, they let emotion guide the way and make choices that may feel more comfortable in the short term but hurt their retirement accounts long term.

As such, you should consider the following commonsense mistakes that can derail your retirement. You can then put a corresponding financial plan in place to help ensure you’re saving and investing in a way that meets your retirement goals.

Commonsense Mistake #1: Buy High, Sell Low

Although most people know the mantra “buy low, sell high,” many individuals end up doing the opposite because emotion gets in the way.

For example, if an investor buys a mutual fund that drops 10% during a stock market downturn, that individual might get nervous and switch to a seemingly safer investment like a bond fund that has increased in price recently. In doing so, however, the investor has not only bought high and sold low—therefore taking a loss in their retirement account—but also misses out on the potential for stocks to recover from the downturn.

If you follow the commonsense wisdom to buy low and sell high, you’ll know that a downturn can be an opportunity to invest in those assets, and you can sell them high, assuming they eventually recover past your purchase point.

Still, you don’t want to try to time the market (see Commonsense Mistake #4); instead, you should focus on sticking to your retirement planning principles. In doing so, you can often naturally buy low and sell high—for example, you continue to invest in stocks during recessions, and those assets appreciate over several years. You then sell them at a higher price once you’re in retirement.

The key is being able to stomach volatility. Having a strong, long-term financial plan can help keep your emotions in track because you’ll know that day-to-day market swings or even recessions do not necessarily affect your retirement planning with a time horizon that spans several decades.

Commonsense Mistake #2: Paying More in Taxes Than You Have To

Even if you file your taxes accurately, you could easily be paying more than you need to, either by missing certain deductions or credits or by structuring your investing in a way that triggers higher taxes. And while many people think they can avoid this commonsense mistake by using an accountant or tax prep software, this does not guarantee you will find ways to minimize taxes. Some tax professionals, for example, might be more focused on simply filing all their clients’ returns on time and without errors.

One way to avoid this commonsense mistake of paying more in taxes than you have to is to work with a financial planner who can help find ways to reduce your taxable and income and minimize taxable events. For example, saving more money in retirement accounts like a 401(k) can reduce your current taxable income, but you might be better off saving money in a Roth 401(k), where you pay taxes now but not on the investment gains in retirement.

You can also reduce taxes once you’re in retirement by withdrawing only what you need (or at least the required minimum distribution if applicable) so as not to put yourself in a higher tax bracket. Here too, having a long-term retirement plan can help ensure that you’re saving and investing in a way that helps you avoid paying more in taxes than you need to.

As a financial advisor in the Richmond, VA area, we recognize that we’re currently in a favorable tax environment here and help clients build a financial plan accordingly.

Commonsense Mistake #3: Putting All Your Eggs in One Basket

This mantra is another commonly held belief that many individuals do not put into practice. Either because of emotions or misunderstanding, many investors have more concentration within their retirement accounts than they realize.

For example, you may look at your 401(k) statement and see you have several different allocations to different mutual funds. However, these funds could have significant overlap in their underlying investments, or they may invest in a similar style or geography that increases your concentration in certain areas.

In other cases, individuals may be too concentrated in conservative investments like bank CDs or savings accounts, particularly if they’re in retirement or nearing it. While this may seem safe, you’re putting yourself at risk of inflation eating away at your retirement savings if you follow this strategy. Instead, you might be better served by diversifying into a few types of fixed-income investments.

Building diversification into your financial plan can help you feel more comfortable with whatever approach you take.

Commonsense Mistake #4: Trying to Time the Market

Lastly, investors too often think they can time the market, but instead, they end up buying high and selling low. For example, an investor might think a crash is coming and sell their stocks. Then a year passes, stocks have climbed higher, and no crash has occurred, so the investor buys back in at a higher price, only for stocks to tumble soon after.

No matter what article you read or what you see on TV, no one can time the market. Even if you take advice from someone who supposedly predicted certain events, these can often be chalked up to luck or coincidence: If enough “experts” make predictions, one is bound to be right. Instead, it’s important to stick to your investment principles and financial plan in order to buy low and sell high as often as possible naturally, without trying to time the market.

That’s not to say you can’t speculate on any investments, but when it comes to your retirement savings, it’s best to take a broader, long-term approach so that you don’t have to consistently time the market accurately, which is essentially impossible. And you don’t want to be gambling with your retirement accounts.

A Commonsense Plan

The best way to avoid these commonsense mistakes is to have a financial plan you can refer to, rather than being guided by emotion. Working with a fee-only financial planner can help ensure that you stay on track toward your retirement goals, rather than speculating and shifting based on external factors.

If you’d like more personalized guidance to create a financial plan that meets your retirement planning needs, reach out to the team at Financial Dynamics. Our group of financial advisors located in the Richmond, VA area can help you come up with a long-term plan to build up your retirement accounts and enjoy your golden years. You can call us anytime at 804-777-9999, or simply text the word “tips” and we’ll make sure we respond back to you shortly. You can also listen to our podcast where we discuss commonsense mistakes in more detail.

Schedule a complimentary 30-minute phone call to discuss your personal situation with a financial advisor.

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