9 Retirement Planning Mistakes to Avoid
Table of Contents
Retirement Planning Mistakes
Setting Improper Goals
Underestimating the Time Horizon for Your Assets
Ignoring the Impact of Inflation on Your Portfolio
Incompletely Judging Risk
Ignoring Foreign Investments
Hiring a Fiduciary Who Doesn’t Act in Your Best Interest
Paying Too Much in Fees
Confusing Income Needs with Cash-Flow Needs
Relying on Annuities for Safe Growth
Setting Improper Goals
How the Industry’s Goal-Setting Process Is Often Incomplete
Investing goals are one of the most important drivers for planning a retirement portfolio, but few in the industry take a comprehensive approach to goal setting. Many investment managers focus exclusively on areas such as risk tolerance—while an important factor to consider, it’s also important to build a portfolio to address overall goals. What is the portfolio’s intended use? Will you need cash flow to fund retirement expenses, or growth so you can leave money to heirs or a charity? Both? Without a detailed understanding of your goals and a focus on achieving them, you may find you’re unable to maintain the lifestyle you desire or, at worst, possibly running out of money in retirement.
How to Avoid Making This Mistake
Defining your goals should be the first step in your investment process. Most investing goals center on cash flow, growth or some combination of the two. After you define what you want your portfolio to do for you and how that might change over time, it’s important to define your investment time horizon, which often relates to your life expectancy or those of your beneficiaries. Knowing how long your portfolio needs to last will help you identify an appropriate asset allocation—the mix of stocks, bonds, cash and other securities in your portfolio.
Fisher Investments provides you with a personal Investment Counselor who will help you assess your long-term financial goals, create a plan and stick to it. Your Investment Counselor will regularly check in with you to make sure your investment goals remain consistent with the original plan. If your goals change, your Investment Counselor will work with you to make sure everything is updated accordingly.
Mistake 2:
Underestimating the Time Horizon for Your Assets
How the Industry Overlooks Your Investment Time Horizon
Simply put, investment time horizon is the length of time you expect to invest your money to meet your goals and objectives. It’s most often how long your money needs to last, and therefore it has direct relation to your asset-allocation decision. Some financial professionals incorrectly focus on the investor’s age, ignoring the investor’s goals that extend beyond their life expectancy. For instance, an investor may have an Individual Retirement Account (IRA) she plans to invest and draw cash from in retirement, but she would like to leave the remainder of the account to her younger spouse upon her death. In this case, the spouse’s life expectancy should be considered in determining the investment time horizon. Similarly, if you plan on leaving funds to children or grandchildren, their time horizons should be considered as well.
Retirement Planning Mistakes – How to Avoid Making This Mistake
Time horizons are unique to each investor and are often longer than life expectancy. At Fisher Investments, your Investment Counselor is here to understand your specific financial needs, both today and in the future. We educate clients that making emotional decisions about asset allocation— favoring short-term comfort over long-term needs—could mean running out of money when they need it most. Cookie-cutter “rules of thumb” and even life-expectancy tables can sometimes guide you to a less-than-optimal asset allocation.
Mistake 3:
Ignoring the Impact of Inflation on Your Portfolio
How the Industry Ignores Inflation’s Impact
All too often, industry professionals focus on the nominal dollar value of your portfolio without considering purchasing power. Over time, your portfolio’s purchasing power can diminish due to inflation. As the prices of items increase, today’s dollars will buy less in the future. Inflation’s negative impact on purchasing power means you may need more portfolio growth than you originally anticipated. For example, healthcare costs may be of particular concern to retirees. Exhibit 1 shows hospital services and medical care are two categories most affected by inflation since 1989.
Exhibit 1: The Impact of Inflation on Prices Since 1989
Source: FactSet, as of 01/15/2019. Bureau of Labor Statistics’ Consumer Price Index components, 12/31/1989 – 12/31/2018.
Mistake 3:
Ignoring the Impact of Inflation on Your Portfolio (Continued)
Further, focusing on short-term stability often risks not getting the return necessary to grow or even maintain your purchasing power in the long run. Since 1925, inflation has averaged about 3% per year.* If we assume prices continue their long-term trend and rise about 3% per year for the next 30 years, a person who currently requires $50,000 to cover annual living expenses will need approximately $67,000 in 10 years, $90,000 in 20 years and about $120,000 in 30 years just to maintain the same purchasing power.
How to Avoid Making This Mistake
You need to consider inflation and how to grow your purchasing power, as well as the dollar value of your portfolio. When considering your portfolio’s return, it’s critical to include the impact of inflation. If inflation averages 3% per year, a portfolio that grows at 5% annually has a real annual return of only 2%—your portfolio can actually only purchase about 2% more, not 5%. That’s not much growth in purchasing power. At Fisher Investments, we take inflation into account when analyzing your current portfolio and recommending an optimal asset allocation to achieve your goals.
*Source: FactSet, as of 02/25/2019. Based on US BLS Consumer Price Index from 1925 – 2018.
Mistake 4:
Incompletely Judging Investment Risk
How the Industry Incompletely Judges Investment Risk
Investors and advisers alike often have an incomplete view of investment risk. Many believe “risk” refers only to short-term volatility. Another significant risk many don’t consider is that of not achieving your longer-term investing goals. One of the biggest risks you can take is running out of money in retirement. For example, some investors may load their portfolios with low-yielding US Treasury Bonds to avoid stock market volatility—even if their investment time horizons are greater than 20 or 30 years. This strategy typically offers meager returns, especially when you consider the impact of inflation, which can put those investors at significant risk of not reaching their longer-term goals.
How to Avoid Making This Mistake
Generally, the longer your investment time horizon is, the more short-term volatility you may need to bear, depending on your cash-flow needs and return objectives. The short-term volatility inherent in stocks can make them feel scary, but stocks are much more likely to help grow your portfolio if you have a long investment time horizon. Exhibit 2 shows to what degree stocks have outperformed bonds over 20-year rolling time horizons (e.g., 1926 – 1946, 1927 – 1947, etc.). Stocks have outperformed bonds in 97% of the 20-year periods since 1926! When stocks outperform bonds over 20-year periods, it tends to be by a wide margin. When bonds outperform stocks, the outperformance tends to be far more modest.
Fisher Investments can help you understand your exposure to investment risk—as well as your investment time horizon and investment objectives—in order to recommend an optimal portfolio asset allocation.
Mistake 4:
Incompletely Judging Investment Risk (Continued)
Exhibit 2: Rolling 20-Year Stock vs. Bond Returns
Sources: Global Financial Data, as of 01/14/2019. Stocks as measured by the S&P 500 Total Return Index; bonds as measured by 10- Year US Government Bond total returns.
Mistake 5:
Ignoring Foreign Investments
How the Industry Often Ignores Foreign Investments
Many managers in the US investment industry focus on US-only investments, mistakenly believing US stocks have enough industry diversity and multinational exposure to properly diversify a portfolio. But this view is incomplete. First, no matter where a company operates geographically, its stock is subject to factors impacting its home country—such as currency fluctuations, regulatory factors, monetary policy and access to credit. This means even owning big US multinationals may not provide much international diversity. Coupled with the fact that US and foreign stocks frequently trade leadership, a portfolio with only US stocks may miss many opportunities abroad. As shown in Exhibit 3, America represents about 60% of the world’s developed stock markets as defined by the MSCI World Index. A portfolio with only US stocks misses out on opportunities in the rest of the world.
Exhibit 3: MSCI World Country Weights
*Europe and Middle East includes 15 developed market countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Israel, Italy, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.
**Pacific includes four developed market countries: Australia, Hong Kong, New Zealand and Singapore.
Source: FactSet. The portfolio shown above reflects the MSCI World Index as of 06/30/2019. The MSCI World Index measures the performance of selected stocks in 23 developed countries. Values may not sum to 100% due to rounding.
Mistake 5:
Ignoring Foreign Investments (Continued)
How to Avoid Making This Mistake
Don’t make the mistake of limiting yourself to domestic markets! The US only accounts for a little over half of all global equities, so there are plenty of investing opportunities outside of our borders. Determining which foreign investments to pick can feel daunting, and if you feel you lack the expertise to research capital markets abroad, seek professional help. At Fisher Investments, we know international diversification is a key part of building a well-constructed portfolio, and we have decades of experience in researching foreign investments. By investing abroad, we can help dampen volatility while keeping you on the path to achieving your goals.
Mistake 6:
Hiring a Fiduciary Who Doesn’t Act in Your Best Interest
How the Industry Might Not Act in Your Best Interest
The investment industry can be confusing with its many professional titles, including brokers and Registered Investment Advisers (RIAs). When deciding whom to trust, you should determine who has your best interests in mind. RIAs (henceforth referred to here as ‘advisers’) are registered with the Securities and Exchange Commission (SEC) and are held to the fiduciary standard—meaning they are required to put your best interests first at all times. Conversely, brokers are generally held to a lesser, suitability standard. In practice, this means that brokers may have incentives to recommend products that aren’t necessarily in your best interests, but still earn them a larger sales commission or kickback incentives.
Recent regulatory proposals from the SEC and Department of Labor suggest bringing all financial professionals under one standard. However, these proposed rules, while well-intended, generally leave loopholes and exemptions that make it more confusing for investors to tell who truly has your best interests in mind. For example, under some previous proposals, brokers would be obligated to act in your best interests for retirement accounts but not for taxable accounts—creating confusion. Then too, various exemptions have been proposed to enable brokers to continue operating as usual so long as they disclose their conflicts of interest. However, far too often these disclosures are buried in the fine print. In these scenarios the result is that brokers can hold themselves out to be fiduciaries, but not always actually have to put that into practice.
Mistake 6:
Hiring a Fiduciary Who Doesn’t Act in Your Best Interest (Continued)
How to Avoid Making This Mistake
Some investors try to avoid this mistake by hiring an adviser held to the fiduciary standard. This is a good starting point, because advisers are obligated to act in your best interests. However, you still need to ask smart questions.
Ask about an adviser’s values. Values guide actions, and an adviser’s values should always include putting clients’ interests first. Ask about an adviser’s investment philosophy. Ask about their sources of compensation and any potential conflicts of interest. Proper structure enables advisers to act on their values, and includes factors like fee arrangements and asset custody practices. If your adviser sells commission-based products or values their bottom line over client goals, they may not always serve your needs first. You can also check your financial professional’s regulatory history and licenses with their regulator. For brokers, that’s the self-regulatory agency, Financial Industry Regulatory Authority (FINRA) website.* You can check similar information on your RIA on the SEC website.**
Fisher Investments has been registered with the SEC and held to the fiduciary standard since our founding in 1979. Our structure and philosophy drive us to act in your best interests. We are a fee-only adviser and don’t earn commissions from trading in your account. We also work with third-party custodians to house client assets in order to help provide transparency and instill trust.
Mistake 7:
Paying Too Much in Fees
How the Industry Might Charge Layered or Complex Fees
Even healthy investment returns can be undermined by fees. Overall trading costs have decreased over time with better technology and increased market liquidity, but layers of fees can still add up. In some cases, fees can make or break your ability to reach your investment goals.
You can incur fees in several ways. Investors who place trades in their accounts will normally pay a commission per trade. For frequent traders, these costs can take a toll. Investors who prefer not to self-manage may hire an investment manager. Some mutual fund managers charge a sales load, known as front-end or back-end sales load, charged when investors buy or sell shares of a fund. In addition, those investors might pay a management fee. Such fees can be a significant headwind to reaching one’s investing goals. It may seem small, but even a 1% fee difference can have a dramatic impact on your portfolio over time. Exhibit 4 shows this potential impact on a hypothetical $1,000,000 portfolio over 20 years.
Exhibit 4: Impact of Expenses: A 1% Difference in Fees Can Cost You More Than $900K*
*This example assumes a $1 million portfolio with an annual return of 10%. The example is provided for illustrative purposes only, does not include transaction costs and is not intended to portray any prior or future performance results. Actual returns may vary.
How to Avoid Making This Mistake
Make sure you know your investment manager’s fee structure and what incentives it creates— ideally it provides incentives for your manager to act in your best interests. As a fee-only RIA, Fisher Investments does not custody client assets or earn trade commissions, and it intentionally separates sales, client service and portfolio management. Our simple and transparent fee is based on our assets under management. So, when our clients do well, we do well. We believe that good advice focuses on your long-term goals and your best interests.
Mistake 8:
Confusing Income Needs with Cash-Flow Needs
How the Industry’s Focus on “Income” May Misinform You
Have you ever heard retirees should focus on income? This is a common misconception. Investors who need money from their portfolio for living expenses often mistakenly think they need to invest for “income,” and industry professionals may focus on this by selling interest- or dividend-producing products. This strategy ignores basic investing principles and may fail to incorporate tax implications into the decision-making process. Using bond interest and cash dividends from equities as the only way to generate cash may force you to sacrifice diversification or broad sections of the stock market, potentially reducing your overall returns and your chance of meeting your financial goals.
How to Avoid Making This Mistake
Put simply, cash flow is the money you need for living expenses and other personal needs. Income is money received from a portfolio, such as equity dividends and fixed income interest. Here is the important difference. The way in which you generate income can have a tangible effect on the growth of your assets. As well as on the taxes you pay—both of which impact your ability to achieve required cash flows.
Fisher Investments starts by gaining a full understanding of your cash-flow needs and expected future income and expenses. Once defined, we can estimate the likelihood of your assets surviving based on alternate asset-allocation scenarios. When you need cash flow, we typically recommend strategically selling certain assets—a practice we call generating “homegrown dividends.” This method can help keep your investment strategy’s asset allocation sound while also considering any possible tax implications.
Mistake 9:
Relying on Annuities for Safe Growth
How the Industry Sells Annuities as “Safe”
One of the biggest risks an investor faces is running out of money in retirement. Brokers or financial planners may pitch annuities. As “safe” products that boast “guaranteed withdrawals” or “minimum returns” in an effort to appease this fear. Some annuities are actually high-cost, complex investment vehicles with fees that may total up to 3.44% annually. When factoring in optional riders!* Others may advertise no fees, but have difficult-to-understand performance calculations that greatly water down returns. These investments may also have severe restrictions that could offset the potential benefits.
How to Avoid Making This Mistake
Fisher Investments does not sell annuities. Rather, we seek to educate you about the complexities surrounding annuities to help you determine. If they are appropriate investments given your financial goals. We even offer an Annuity Evaluation program that may help you transition to a more sustainable investing strategy. If suitable for your needs. We don’t earn commissions from selling products (like annuities). And we have a fair and transparent fee structure that aligns our interests with yours.
*Source: Insured Retirement Institute (IRI) and Investment Company Institute (ICI), as of 01/12/2018. Based on average annual annuity fees of 1.21% as stated on page 114 of the 2016 IRI Fact Book. Average mutual fund fees of 0.63% based on page 89 of the 2017 ICI Fact Book. And guaranteed lifetime withdrawal benefit rider fees ranging between 0.35% to 1.60% annually based on page 102 of the 2016 IRI Fact Book.
