Mistake No. 3: Not Striking the Right Balance
There's no hard-and-fast answer to the age-old question "How much of my savings should he in stocks?" However, there are guidelines. Most people take either too much or too little risk. Some people close to retirement panic at the thought of losing money and become very conservative, avoiding stocks at all cost.
Ironically, that decision could deprive them of the growth they need to retire when they want to. Once they're retired, a portfolio that's too conservative won't keep pace with inflation, and will put them at risk of running out of money before they run out of life.
My suggestion is to have one portfolio that's comprised of 60 percent equities and 40 percent fixed income, which is close to the general stock-bond allotments of most "balanced" funds. For the equity portion, I strongly favor low-cost, tax-efficient index funds that cover all types of stocks, such as large-cap and small-cap, growth and value, and domestic and international. Spread your money among asset classes that don't go up and down together. This is called asset allocation.
Mistake No. 4: Not Saving in the Right Places
Because the earnings in a qualified retirement plan are tax-deferred, they should hold the lion's share of your nest egg. While this makes perfect sense, you also need to earn money in taxable accounts such as IRAs and personal portfolio investments. You and your financial advisor should examine all of your investments as a whole.
Keep bonds and other fixed-income vehicles in retirement accounts, and in stocks that you intend to hold for a year or less. You would have to pay short-term tax rates on capital gains each year if you held them in a nonretirement account.
If you own actively managed funds which have a lot of turnover and tax consequences, hold them in retirement accounts to defer taxes on the gains.
The exception to this advice is municipal bonds, since the interest on them is exempt from federal tax, and possibly state and local taxes, as well. Owning them in a tax-deferred account makes about as much sense as carrying an umbrella when the sun is out.
Real estate belongs in nonretirement accounts. There are advantages to owning investment property outright rather than in a retirement account. For example, when you sell a property you are taxed at the favorable 15 percent capital gains tax rate if the investment has appreciated. If you sell at a loss, you will get a deduction. You'll also have the tax benefit of depreciation if you own a rental property.
Mistake No. 5: Not Insuring Your Savings
A prolonged illness, accident, disability or simple aging may require home health care, assisted living, or a nursing home stay that can result in a crushing blow to your retirement savings. A typical three-year stay at a nursing home costs over $200,000 and is sure to rise dramatically as baby boomers age.
Long-term-care insurance is probably the most overlooked, yet essential, coverage. The odds for long term care are far greater than the odds of having your house destroyed by a catastrophe. Yet, almost everyone has homeowner's insurance, and only a small percentage of doctors have long-term care coverage.
I am frequently asked, "When do I buy?"
I answer, "When you're 50. Buy while you're still relatively young and in good health, and can get it fairly cheap." At this age, a typical policy runs from $700 to $2,000 a year, including an inflation rider.
Ultimately, even if your planning is mistake-free, you may need to alter your retirement vision. The notion that retirement is all leisure is not realistic. Some factors don't show up until later. For instance, do you have aging parents or adult children to help support? How much debt do you have? How important is it to leave money to your heirs?
Everyone's needs and wants are different. My advice is to be flexible. Recognize that you may need to adjust your retirement plan as time and circumstances evolve ... Remember, "You can plan, but you can't predict."
When it comes to planning for retirement, it all boils down to two simple questions: Will you outlive your money, or will your money outlive you?
Hugh F. Doherty, DDS, CFP, is a Certified Financial Planner(TM), national lecturer, financial advisor to the health-care profession, and CEO of Doctors Financial Network.
Source: Dental Economics. Powered by Yellowbrix.
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