The ten worst retirement planning mistakes

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The onus is on you to get your own planning right. Paul Clitheroe reviews the ten biggest retirement planning mistakes – and why you need to avoid them.

For past generations, retirement planning was something of an after-thought, if considered at all. It was simply a case of paying off the family home, tucking away a few shares, bonds and some cash and relying on the safety net provided by the age pension to get by. But in the twenty-first century, this is no longer enough. In fact, industry studies suggest many couples plan to live on more money ($30,000 pa) than the Age Pension currently provides (around $19,000 annually).

So, the implication is, if individuals want to live well in retirement, the onus is on them more than ever to start saving as early as possible, establish their retirement goals, to evaluate the myriad of investment options and be aware of the risks involved. At the same time, with this greater investment complexity, it’s also possible for investors to get confused and make mistakes that can affect retirement savings. In this article, I will look at some of the more common investment mistakes, the signposts to look out for and strategies for turning mistakes into winners. Let’s start by looking at probably the most common mistake, “Failing to Plan”.

1. Failing to plan for your financial future

“Fail to plan, plan to fail” is just so true when it comes to investing today. In fact, the recent ANZ Survey of Adult Financial Literacy in Australia, said only about 37 per cent of adult Australians had worked out how much they needed to save for retirement. Look, the money just won’t appear in your bank account the day you retire and this is where a financial plan is so important. It is q bit like a road map that indicates where you want to go (a comfortable retirement) and the best way to get there. The plan should contain investment advice and information about the level of risk attached to your investments. A good plan will also address issues like what insurance you should consider, your taxation position, cash flow (budget) as well as any retirement and estate-planning issues.

2. Not having a budget

Put simply, budgeting is the most effective tool there is to get and keep your finances under control. A budget tells you where you money is going, where you can cut back and where you can save. Look, I know there’s no denying cutting back on your spending is difficult when there is so little fat to trim in the first place. But no matter how much you earn, it is a question of taking co troll of your money. And this means managing your cash flow, which can only be achieved through budgeting.

A budget will also give you a much better idea of where you money is actually going. It is estimated that people regularly spend between $50 and $300 each month that they can’t account for. Yet this money could be used to pay off debts like a credit card or mortgage or be added to your retirement savings.

3. Leave your money in the bank

Sure, the bank is a terrific place for your everyday spending money but it’s no good for your investment money. If you really want to stick with the bank, don’t leave money in it, buy shares in it. Shares (and property for that matter) present more risk than cash and in the early days may actually generate little or even negative returns. On the other hand, shares and property generate capital growth over the longer term and returns may be taxed favourably.

4. Panicking at the first sign of trouble

The road to successful investing is fraught with many obstacles, as share-market investors can attest! The successful investor takes minor setbacks in their stride, remembers not to panic and sticks with the original investment strategy. If a quality investment (like shares or property) suffers a decline, it is generally the worst time to sell. Selling will only cost you money. But if you hang on and even buy more during a down-turn, you’ll be better off when the investment recovers.

5. Chasing historical performances

A few years back, the Economist magazine produced some interesting research that illustrates the folly of chasing past performances, The research showed how if an investor started with $1 on January 1 1900 and then hypothetically predicted the best investment market every year up to 2000, the result would be a massive $9.6 quintillion (before tax) windfall. However, if an investor had invested in the previous year’s high-flier (a mistake made by many investors) every January 1, the initial stake of $1 grew to only $783 before tax. The lesson here is don’t take too much notice of past performance and focus more on what could affect an investment in the future.

There are other mistakes investors make too, such as falling for the charms of get rich quick schemes, being swept up by media hype about certain investments and miscalculating the level of risk you are comfortable with. What I mean here is being aware of the maxim: the higher the risk, the higher the return. Many people take on more risk than they are comfortable with to make a quick buck. But when the investment falls short, they’re left in a difficult place financially.

Finally, it is important to be aware of the common investment mistakes, but also if you get it wrong, it’s not the end of the world. Simply learn from it and move on. Alternatively, if you are unsure about an investment move, talking it through with a qualified financial planner could prove to be a smart move. But at the same time, employing the services of a financial advisor is not a sign you can simply hand over holus bolus the responsibility for your money either.

Click NEXT to read the next five planning mistakes

6. Timing the market

You don’t have to be Einstein to see why some people will try to get their market timing right. Anyone who can consistently pick upward share movements will end up very rich, in just the same way a punter who can consistently pick winners will do very well. But like picking winning horses consistently, getting your market timing right is easier said than done.

An excellent example of the folly of trying to time the market was demonstrated by a study of the US share market between 1980 and 1993. The study found that if an investor kept their money in the market during this period (1980 to 1993) they would have averaged a 15 per cent return annually. However, if they missed just ten of the best trading days during this period, their return was reduced to 11.9 per cent. If you missed the forty biggest days, this reduced your return to 5.5 per cent.

So those thinking of quitting their jobs and jumping into day trading take note. Rather than trying to beat the market, I would advise investors to buy good quality stocks and stick with them for the long term. By the long term, I mean for at least five to seven years – and you’ll be amazed at how quickly your money begins to grow.

7. Not diversifying

Having all your eggs invested in one basket could prove to be risky, especially if that basket topples over (eg share-market October 1987, property market early 1990s and technology shares, April 2000). Spreading your money across asset classes like cash, fixed interest, shares and property can produce more consistent returns over time.

8. Not doing your research

During the tech bubble of the late 1990s, it was not uncommon for investors to take share-market advice from family, friends, work colleagues and even well meaning taxi drivers. What compounded this common mistake was that many then acted on this advice without doing any research for themselves. Always research any investment (buying property off the plan, managed investment or new share listing) and find out who is behind it. Undertaking a period of research also gives you time to coolly evaluate an investment that initially looks good but on closer examination might in fact not be appropriate.

9. Investing in tax schemes

When it comes to tax and investment, please be cautious about tax schemes. Tea-trees, movies, olive oil and ostriches. You name it, I’ve seen it – tax schemes in every colour, shape and size that are usually bought in a desperate panic in June by people with a tax problem. My advice is quite simple. With any investment scheme, unless you really understand the nature of the investment, don’t do it.  Looking at my own clients, I find that those who have simply concentrated on minimising their tax in the usual ways, paid what they owed and concentrated on a sensible investment strategy end up miles in front.

10. Left it too late

Starting young and saving small amounts regularly is the most certain path to financial independence. But at the same time, it’s never too late to start planning for your retirement either.  I have clients of all ages – and many older than 55 when they first approach me. The first step is to pay off the mortgage, if you haven’t already done this. This can be achieved by increasing repayments if this is possible. Once the mortgage is cleared, then it’s time to consider other investment options.

One option here is to consider topping up your super through ‘salary sacrificing’. This is a simple strategy where you can rearrange your pay so that your employer pays a proportion of your salary (previously paid in after-tax dollars) to you in pre-tax dollars into your super fund. By investing more money in a super fund you also get exposure to a range of managed investment choices – balanced, capital stable and growth fund options. By doing this you’ll soon find that you are better placed come retirement.

An edited version of The 10 worst retirement planning mistakes, first published in YL (Your Life, Your Retirement) magazine

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Total Comments: 45
  1. 0

    One of the biggest mistakes you can make is listening to so called experts who tell you-before an event has happened (eg GFC) how to invest your Super and then pontificate after the event on what you should have done. We retired when the stock market was sitting on 6800, feeling apprehensive about the future, (even with an adviser and an on-line investment so called expert giving no warning) we cashed in some of our shares and at least now have had the cash to survive on. We live in hope that what is left of our Super in the sharemarket will in the coming years increase in value.
    My warning to those anticipating retirement is do not trust advisers, keep yourself well-cashed up and run budgets and be very wary.

    • 0

      Best advice you will ever get Dawn, stay away from Financial Advisors.

    • 0

      Correct Dawn.
      Advisers give out streams of advice, and never ever can or will or have been able to give advice for unknown circumstance s time moves on.

      So their advice is at absolute best , guess work! That’s just a fact.
      We thought three or so years ago we had planned and prepared and I believe now got over advice or planning that saw us lose out , in fact a situation that we had, cost us money, where the situation was unavoidable we helped out . You know what I mean. Not the huge amount but enough to see us go down the tubes with finances. We have assets no cash , but are slowly getting back in front, we had no choice.
      But helping family is deemed tough luck, deal with it!

      No matter what the circumstance s are.

      We had planned btw.

      Any how my super is gone, I am lucky to have a relatively small but ok workplace fund that pays me a pension of which I contributed to for decades..
      My wife works part time , and still paying into her super, we will survive. Nothing like we thought though, extremely disappointing when you do have sensible plans and things to do, but thats the modern world where few have lots, and lots have few .
      I can’t get a pension, yet, not even part . I have been refused , I must be very wealthy ? I have re applied , we need the help.
      But I am very doubtful, and it shouldn’t be this way.
      But advisers like anything can only give out the same old same old, and they are only in general, correct.
      But to read the paper and see advice , and say to yourself I did all this , then find yourself not so well advised , its amazing , I wonder what these advisers get paid to write all this “good ” stuff.

      The Governments could stop fiddling with the super rules too. When they change things it means they have lost control of the way they were going in investment of all the billions in super?
      And have to change things around to pay “whatever????” they have made a mistake with.

  2. 0

    We live in hope that what is left of our Super in the sharemarket will in the coming years increase in value.””””””””Ï did just that and ING lost me sixty thousand dollars in 4 years ,This was Allocated pension ,surely someone was taking risks with my money,when I complained they said I shouldbhave got a financial planner ,I thought being given control of pensioners money they would be more careful than a financial planner,Show me a financial planner who makes their clients money,ING guided me to Retireinvest well 20 yrs ago they lost a bundle for their clients on a French Investment Group and anyhow ING own Retireinvest,I am still with ING but they give me no details of their funds or how much interest they are giving on deposit ,again why would I pay Retireinvest to tell me that they couldnt do as well as my bank deposit at the moment or my Perpetual Industrial Fund over the last 20 years.By the way my original Pension fund was taken over by Mercantile Mutual ,then ING and now ANZ and I wasnt even told .I was originally told by the first fund now go away for 20 yrs ,we,ll work your money ,”””where I wonder ,,,,at the Burswood Casino

    • 0

      I agree with nobody.I gave my money to Colonial and they managed to lose more than a half in one year claiming because of depression. They also were supposed to pay me a pension out of the interests instead they pay me by selling my shares and the capital. What was the use to “invest” with them?

    • 0

      Bottom line the share market is a T.A.B. Its a gamble and it runs the world.
      It is a joke. We all know because a small few make billions from it even when they stuff up disastrously , see….GFC.

      My friend has a good pension plan , when retired his money stayed in his Bank stroke centelink, they planned everything. I guess no huge return , but bloody regular and will always be there.

      Its those who hope for easy pickings in a dangerously “chancey” business gamble, and Retirees are sucked in like the unknowing poor buggars they are.
      If your not greedy go for total safety, and, even then watch the bastards!Not because they rip you off , but because even the government run places, are incompetent at times!

  3. 0

    What most funds fail to do, is to let you know that they can invest in term deposits and necessarily in shares. We were lucky and got out some 3 years ago and our accountant created a SMSF and we invested all our money in various Fixed Term Deposits. We do our own investment with the Bendigo Bank and our accountant prepares the annual tax return at a fee of $550. It is NOT true that you need to have lots of money for it to be of value. Our fund totals around $300,000 and it is economically viable. The advisers push for the big funds as they get commissions. Do your homework, and take no risks.

  4. 0

    I would be very wary of most financial planners. They will charge you big money to put a plan together and then lose your money once you give them control. My mother was sucked in be a planner who put her money in high risk investments and only wanted the big commissions he was getting until it all came crashing down. The only safe investment is putting your money in the bank and then they don’t pay much interest and you still lose.

  5. 0

    All good advice – if you can afford to spend your retirement years worrying every day about what’s happening to your funds. Not a recipe for long life in my book.

    Use common sense. i.e…watch the cents and the dollars will take care of themselves!

    The advice offered in this article would indicate that that best thing you can do with your money is help make a financial planner secure in their old age – a bit like it was in the gold rush days where the only rich people were the ones who obtained the gold from the miners who did all the work digging it out!

  6. 0

    I am 62 and have had financial planners for the past 15 years mainly because I did not study up much on how I was being charged, only recently I started to do some sums, and was bowled over how it worked, this is how It appears to me.
    Say you had $1,000,000 in super with a fund manager and were being serviced by a Financial Planner, in retirement you would be being charged 1.2% of your total value under management which would equate to $12,000,
    now the return to you would be 5% income which is $50.000 now you are paying the fund manager equal to 24% of your income, this to me seems as if you are working and paying tax, and the fund would have to earn at least 6.2% to break even, now if you took control of your money and invested in bank, Telstra and food retail type shares you would still average 6.5% return grossed up tax paid at 30% with the possibility of capital growth in the long term, the funds and planners give you an income for so many years and then the money runs out, Am I looking at this too simplistically.
    PS. Even if you put your $1,000,000 in the bank at 5% = $50,000 you still would only be paying $7,797 in tax, $4,203 less than what a fund manager would be charging you.
    These are only theoretical rounded of figures that I am using just as an example.
    What do you think?

  7. 0

    You left our one major one. Don’t retire before you own your home. Continuing to pay it off on a pension, even on self funding , is very hard.

    • 0

      I own my home , still in strife?

      So I must be stupid.

      or simply stupid!

      The system is what kills, its confusing unfair and allows so called smart arses to get your money to work FOR THEM! hah!

  8. 0

    And whatever you don’t listen to other people, financial oplanners included, just use. Our common sense. If I had done what e Finanacial p,angers had said when I took a redundancy I would have lost all my money. For a $150,000 investment I own a house worth 3/4 million and we’ve never been well off. I knew I would move and downsize to a cheaper and warmer area and will have half that money to invest in safe investments so I don’t have to stress about it. Be realistic about what you actually need. Lots of people have unrealistic expectations made worse by wealthy people like Clitheroe who’ve probably never had to live on a blue collar wage. And if you can manage it – don’t get sick and have to retire earlier than you planned. Life has a bad habit of happening without any help from you.

  9. 0

    There are Financial Planners and Financial Planners – they are a bit like cars, you find good ones and you find bad ones. I have all my super with State Super hence for a small fee I get free financial advice and have been taking advantage of this for the past few years as I head toward retirement. The advice I have been given has always been good and my fund balance is looking very healthy with the GFC having minimal impact and the minor loss incurred there since being well and truly made up for, thanks to very strategic investments by State Super. The main thing for people to be aware of is to select an investment plan that is not high risk, especially in the last 10- 15 years of your working life.
    Sadly, not all property investments turn out as well as Renny’s has. I know a number of people who have been burned by what were supposed to be rock solid investments but which turned out to be little more than a con.

  10. 0

    I also have a healthy disregard for most financial planners but Paul Clitheroe is one I have a healthy regard for. Every point Paul makes is sound. But I’m into DIY. But just like when we were young we skilled our self to participate in a sport or in a future job so we should do the same for financial health in retirement. Don’t spend money on a financial planner who is less than half your age and/or maybe has less than half your IQ; instead spend money on your financial training. And you can go a long way on the journey of becoming financially skilled without spending a single dollar; the world wide web has lots of free training. The ultimate of your financial health in retirement objectives should be to be capable of determining what an investment is worth. It’s not rocket science. Then when world investment markets panic you can seize an opportunity to make investments at discounted prices. But the caution is to know your capabilities before backing yourself.

    • 0

      Hi Aussieone, great points you make, financial advisers have the training to give advice make sound investments for you but when the market drops as it did with the crashes they also get it wrong and tell you that you are in it for the long term, and they tell you the market will rebound as it always has, and like you have pointed out with a little training and not panic when the market goes down and invest in good quality stocks they will rebound and generally surpass previous highs, all this without paying the fund managers and financial advises what equates to about the same fees as if you were working and paying taxes on your retirement income. about if my figures are correct 20-22% of your retirement income, at 5% income on your total super fund.

    • 0

      Of course he makes sound comments. But they are general , very general, and every one of the 7 billion people living on this earth , are different in circumstance. He can never be correct or incorrect for anybody.
      He can write up good general advice for every one for a fee.
      I bet he’s doing ok.

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