Retirement planning mistakes you can’t afford to make

The road to retirement is full of twists and turns and a lot to plan for — marriage, family, college, career changes, taxes, your dream home, not to mention unexpected events. It’s not a drive you can take on autopilot; it requires constant attention and frequent adjustments.

There are a lot of important decisions you need to make along the way, and the wrong ones can potentially cost you hundreds of thousands of dollars. Here’s how to avoid the four biggest mistakes people make when planning for retirement.

Mistake #1 - Thinking you can always start tomorrow

Many retirees say their biggest regret was not saving for retirement earlier. It’s an easy mistake to make as it’s harder to save for an abstract event in the future, such as retirement, than it is to spend money in the present. Life, and it's everyday expenses, eat into our ability to save. By not starting early, we miss out on two incredibly powerful forces that can help us grow our money – time and compound returns.

Here is how much you would need to save to have $1,000,000 by the time you are 65 (assuming an 8% return on your investments):

• • • At 20, about $300 per month.
    • At 30, around $650 per month.
    • At 40, almost $1,400 per month.
    • By 50, a whopping $3,400 per month.

Waiting means you need to save a lot more just to catch up.

How to avoid starting too late: The key is to start small. Small changes are easier to implement, more likely to stick, and less likely to disrupt your life. Start by saving 1% of your income or increase your savings rate by 1% from where it is today. Every six to twelve months, increase your savings by another 1%. Small changes can have a big impact and materially change your retirement fortune.

Mistake #2 - Ignoring the impact of fees on your returns

Not paying attention to fees can have a very big impact on your investments. Small differences, even 0.50% or 1%, matter because the amount you pay goes up every year as your money grows. Choosing investments or financial advisors with high fees can be a costly mistake because these fees take money out of your pocket.

Assume you started with $25,000 in a retirement account, saved $10,000 per year, and achieved a 7% return. A 1% fee could reduce the amount of money you have by 20% to 25% (over 30 to 40 years, respectively). So for every $1,000,000 you could have saved, you would have lost $200,000 to $250,000 in fees. Your situation may be different, but fees will cost you a lot of money over time.

How to avoid high fees: First, focus on investments with the lowest costs possible, such as exchange-traded funds (ETFs). ETF fees are often as low as 0.05%, compared to many investments with fees close to or over 1%. Second, when working with a financial planner, make sure you know how much they charge. Many charge a 1% fee based on how much you invest which means your fee goes up as your money grows. Instead, look for a CFP® Professional who charges a flat fee that’s tailored to your needs.

Mistake #3 - Taking the wrong approach to investing

Many people think investment success comes from timing the market to avoid downturns and losses or picking the winners. These types of actions illustrate one key element of a poor approach to investing: poor behavior. In fact, studies show that investors who overreact to downturns or try to time the market make less, not more.

The annual DALBAR investor behavior study found that the average investor* underperformed the S&P 500 Index by more than four percentage points over a 30-year period that ended on 12/31/2020 (6.24% compared to 10.70%)**. Here’s how much you would have after 30 years if you started with $100,000:

• • • 6.24% return = $614,700.
    • 10.70% return = $2,110,700.

That’s a difference of almost $1,500,000. Think about what that kind of money could do for you.

How to avoid the wrong strategy: First, create a financial plan to clearly define your goals. Next, develop an investment strategy based on your time horizon, capacity for risk, and your tax situation. Finally, stay invested and remain disciplined (i.e. behave). A good investment strategy will evolve with your life and your plan and will help you achieve long-term success by participating in market returns, not trying to beat them.

Mistake #4 - Believing professional guidance is a cost and not an investment

Think about the investments you’ve made to improve your personal, professional, and emotional well-being — degrees and professional certifications, healthcare, gym memberships, and even therapists. Yet, we often avoid financial advice because of the perceived cost. Seeing financial advice as an expense and not an investment can be a very costly mistake.

A Vanguard study showed that a financial planner can add as much as 3% to investment returns per year. How? Not because of market timing or stock selection, but from helping clients create a low-cost, risk-appropriate, tax-aware strategy and helping them remain disciplined and stay invested over time.

How to avoid not making an essential investment: Find a CFP® Professional who can help you plan for all aspects of your life, not just your investments. Financial planning, when done right, can help you create a roadmap for life — marriage, kids, your dream home, career changes, college, retirement, and so much more. It’s an investment that can help you avoid very costly mistakes and substantially improve your well-being today and in retirement.

To avoid these retirement mistakes, create a plan today

There are a lot of opportunities to make mistakes along your road to retirement that can cost you a lot of money and put your retirement at risk. A personalized plan – one that dynamically evolves over time – is essential to avoiding very costly mistakes, keeping more money in your retirement nest egg, and putting you in control of the life you want to live.

_{*Average Investor as determined by Dalbar.}

_{** Source: "Quantitative Analysis of Investor Behavior (QAIB), 2021," DALBAR, Inc. www.dalbar.com.}