Retirement Mistakes to Avoid

In the current state of stock market volatility it is very easy to lose focus and discipline. Keep your perspective and avoid investing by emotion. This blog talks about common investment mistakes that can have a significant impact on creating wealth for retirement.

Mistake Number 1: Cutting back on contributions. Let me give you a personal example. I owned Avaya and it tumbled along with every other stock in the telecom crash. As it was going down, I stopped buying it in my Employee Stock Purchase Plan and I did not get the company funded 15% discount. The stock went down to about $2/share and initially I was glad that I had avoided the pain. As you may remember in 2007 all Avaya shareholders got about 8 times this amount. Every share that I would have purchased at $2/share and I could have bought quite a few increased by a factor of 8 in less than 8 years. In hindsight, this was a very dumb move on my part.

Mistake Number 2: Changing investment strategy in mid stream, aka Market Timing. This has to do with switching away from equities with long term growth into something safer in a downturn. The problem with this is that nobody makes an announcement that says this is the bottom now change back. By the time you realize that a stock market is now going up you have to switch everything back. Typically, this move costs you 2 ways, lost money from a slow growing investment as well as the transaction costs.

Mistake Number 3: Using retirement money as a bank. Since I have a farm background, let me illustrate this with a field of corn. Imagine you plant an acre of corn and you can get 100 bushel of corn from this acre. Now as the corn stalks are starting to grow, rip them all out and replant the field. You have lost both time and money because now you have the cost to replant (penalty for early withdrawal) and lost time because it takes a full season for the corn to grow (delay retirement date). Once you plant your corn, let it grow.

Mistake Number 4: Cashing out a retirement plan at a job change or transfer. Just like above, why do you want to rip out your corn stalks before harvest? If you find yourself in a financial situation with a job loss, Do Not Sell Everything and Go Into Cash. Get professional help as alternatives exist.

Mistake Number 5: Avoiding professional help. Being penny wise and pound foolish can be very bad. A $10,000 investment invested for 30 years at an average 5% return grows to about $40,000 while at an average 10% return grows to about $160,000. This was calculated using the rule of 72. I assure you that I will not come anywhere close to charging $120,000 in fees.

Learn and profit from my mistakes.