There is something very comforting about receiving paychecks. What I’ve observed is that many workers are less concerned with the ups and downs of the stock and bond markets as long as they have the security of a steady paycheck. All of that changes once they retire. No more paycheck and the thought of a 2008-style market crash weighs heavily on the minds of the freshly minted retiree. “How should I reposition my investments now that I no longer have a paycheck to pay my bills?”, they ask themselves. Too often, their answer leads to significant, long-term investment mistakes. Here are three of the mistakes I often see from retirees:
- Locking in a lifetime low income. Annuity salespeople push annuities hard to both pre-retirees and retirees alike. In a recent advertisement, they promised a 10% guaranteed, no-risk return. Just ‘FYI,’ the 10-year treasury is yielding 2.66%, and the 30-year treasury is yielding 2.97%. I promise you there is nothing out there today that can offer a 10% long-term guarantee. Just don’t believe them! If it sounds too good to be true, I promise you there’s a ‘gotcha’ somewhere in the deal…also, these deals are costly to get out of.
- Ask the salesperson how, and how much, they get paid on the sale. The financial incentives to sell you a product will astound you!
- Ask them how much it will cost you do get out if you change your mind a couple of months or years from now — another mind-blowing number.
- Pay an independent, third-party professional such as a CPA, to review the contract before you buy.
- Owning too many bonds (CDs, Money Market). This is a similar mistake to #1 above but with a slightly different angle. Fear of a 2008-style market crash will often drive a retiree to decide to invest primarily in bonds, CDs, or money markets, where there is no exposure to the stock market…after all, ‘You can’t afford to lose your money, right?’ Average inflation over the past decade is about 1.7% but looking back over the past 30-years, it’s been as high as 6% in a given year. And some major retiree expenses are likely to be significantly higher than average…such as healthcare. The fact is, for most retirees, you’ll need a significant allocation to stocks for long-term growth.
- Generally speaking, your allocation to stocks during retirement should be a minimum of between 40% and 60%.
- Consider traditionally safer stocks of blue-chip, dividend-paying companies who have a long-term history of raising their dividends over time. Seek professional assistance, if needed.
- Chasing yield. Fear of the stock market and low interest rates causes many retirees to seek higher yields in fixed-income investments. Again, annuity salespeople come to mind…re-read #1. Sometimes we’ll find lower-quality bonds or ETFs, junk bond funds in the retiree’s portfolio. Don’t assume the current low interest rates will prevail for the next twenty to thirty years of your retirement. They won’t. And when interest rates do rise, these investments can take a pounding.
- Avoid lower-quality, longer-term fixed-income investments.
- Avoid annuities.
Follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment.
WBRC Fox 6 Talking Points
“3 Mistakes Retirees Make”
- Locking in Lifetime Low Income
- Owning Too Many Bonds, CDs, Money Market
- Chasing Yield
Stewart H. Welch, III, CFP, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. He is the author or co-author of six books including J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaire; and 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. For more information, visit The Welch Group. Consult your financial advisor before acting on comments in this article.