Outside the Box: 10 mistakes nearly everyone makes when saving for retirement

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Until we retire we are all preretirees. So this article applies to you unless you’re already retired.

However, my fundamental focus here is the mistakes people make in the last 10 years before they retire.

Here’s why this is a critical time: If you’re 10 years out, or even five, you have time to do some course corrections that will make a difference — but you don’t have time to waste.

Based on my observations from talking with thousands of investors over many decades, let’s look at 10 errors, each of them far too common.

1. People approach retirement without a coherent, organized plan.

I don’t think you need a thick binder projecting your net worth every month until the year 2065. But if all you have are some vague ideas, you’re making your life more difficult than it needs to be.

At a minimum, you should know how much you’ll need to meet your cost of living and what your reliable sources of income will be when you’re retired. There will probably be a gap between those numbers, and you should have a plan for how to bridge it.

In the process of making a good plan, you’ll necessarily avoid most of the mistakes in this list. Here is a link to a chapter from my book, “Financial Fitness Forever,” to help you get started.

2. Preretirees are too confident in their ability to see the whole picture.

Retirement planning, if done right, has too many moving parts for most of us to get it right by ourselves. Retirement is (usually) a once-in-a-lifetime event, and we have one chance to get it right. No practice runs.

If you don’t have a financial adviser, I suggest you find a professional to review your plan and spot any crucial pieces you may be overlooking or misjudging. If your money is invested with a major firm like Vanguard, Fidelity, Schwab SCHW, -3.41%, or T. Rowe Price TROW, -3.27%, you can probably get a free (or low-cost) consultation and review.

You’ll get more if you hire a professional by the hour, preferably one who has nothing to sell and no conflict of interest. If you need help finding such a person, here’s a good conflict-free resource: Harry Sit. For $200, he’ll find you an adviser whose profile checks off the most important boxes, and I think Harry’s service is well worth the cost. (I have no affiliation with him or his service.)

Read: Social Security is already in trouble — a payroll tax cut could make things worse

3. Preretirees often don’t have any clear understanding of whether they have “enough.”

Many who I’ve talked with think they are far behind the 8-ball and thus continue to take the same level of risks they took when they were young. By doing so, they put their retirement plans in jeopardy.

The fact is, there comes a time when protecting what you have (defense) becomes more important than trying to get more (offense).

The best way to avoid this mistake is to heed the advice in item 2 above.

Read: Millennials are the new face of the retirement crisis

4. Some people retire at 65 or some other predetermined age even though they could happily continue working — and thus potentially double their retirement income.

My wife and I decided to work another five years after we knew we had “enough.” The result: We now have twice as much money to live on.

Read: How to double your retirement income in five years

5. I see this way too often: People hang on to past investments that once seemed like good ideas, but were in fact poor choices because of high costs, high turnover, unnecessary tax burdens — or just unrealistic expectations.

All of us are prone to make mistakes now and then. But some people hang on far too long to ill-advised investments, hoping against hope that they won’t have to face the music.

While they do nothing, their money is not working to meet their needs. Economists have a phrase to describe the result “opportunity cost.”

In other words, by doing one thing, you lose the opportunity to do something else that could produce a more desirable outcome.

6. This is a variation on the previous item: I’ve seen many people enter retirement still owning a piece of land on which they were going to build a retirement home or getaway, even though the initial dream had faded or died some years earlier.

My advice: Don’t keep incurring this opportunity cost. Instead, consider selling the property so you can put the proceeds to work and finance your current dreams.

7. Many people are afraid to take even small amounts of investment risks that have a high probability of boosting their returns.

I’ve seen too many cases of soon-to-be-retired folks with equity investments exclusively in funds they consider “safe” (often clones or near-clones of the S&P 500 index SPX, -2.59% ).

Even in the final stretch toward retirement, you can still benefit significantly from exposure to value funds and small-cap funds.

Holding 10% of your equities in small-cap or value funds (or small-cap value funds) won’t increase your risk very dramatically. But it can add 1% or more a year to your returns, and that’s enough to make a difference you’ll notice.

8. Many people approaching retirement take too much risk by failing to add bond funds to their portfolios.

This is a variation of item 3 above. There’s always a tricky trade off between risk and return, and this dynamic often enters the picture during the years before retirement.

I explored this topic in a prior article that includes tables showing the implications of different combinations of stock and bond funds.

9. Lots of people approaching retirement realize their savings are likely to be inadequate, yet they keep spending more than they need to.

People, listen up: If you’re concerned about whether you can afford to retire in five years, this is not the time to buy a boat, take your extended family on a cruise, pay for a destination wedding or make a flashy charitable contribution that gets you lots of attention.

Cutting back for a few years has two huge potential benefits. First, it allows you to save more money. Second, it demonstrates that you can indeed live on less than you thought.

10. Too many retirees plan on achieving future investment returns to be at least as good as past returns.

This is a recipe for big trouble, because an extended period of below-average returns is always possible. This is one of the items that should go into your overall plan, discussed in the very first item on this list.

Personally, I think it’s a good idea to base your planning on the assumption that future returns will be 2 percentage points less than they have been.

The downside: Your plan will indicate you need more savings, and you may need to cut your spending and/or postpone your retirement.

The upside: If your assumption is right (and returns are indeed lower than they have been), you’ll still have enough. And if you’re wrong, you’ll still have a smile on your face … and more than enough money to live well in retirement.

If you can avoid most or all of these 10 mistakes, you’ll be more likely than many of your contemporaries to have a successful retirement.

That’s my wish for you.

If you’d like to review this topic further, I’ve recorded a podcast called “How to avoid the big mistakes preretirees make.”

Richard Buck contributed to this article.

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