by Shad Lamm, CRPC®
When you've saved your whole life, you usually want to protect your assets at all costs. Regardless of whether you are nearing retirement or already there, you desire to preserve what you have diligently worked for. While some factors are out of your control, such as market movements, there are certain behaviors that could result in your nest egg diminishing. Here are some ways you could run into retirement trouble:
It’s all too easy to get swept up by the lure of active markets and promises of big returns. However, for someone preparing for retirement, it’s much more appropriate to focus on a long-term strategy. The markets fluctuate every day and attempting to beat the market will cause you unnecessary stress and potentially damage your savings.
You can avoid this behavior by creating an investment philosophy based on your goals, personality, and risk level. Then, stick to it regardless of what happens in the markets or what the latest headlines declare.
A 2015 Dalbar study shows how playing the market leads to underperformance. Buying high and selling low due to panic lowers your overall return and may jeopardize your retirement. What should you focus on instead? Maintaining a long-term perspective and a disciplined approach and refusing to ride the market roller coaster.
This is more common than you might think. The Transamerica Center For Retirement Studies tells us that 23% of people surveyed dipped into their retirement plan to pay for an unexpected expense. This behavior can result in a retirement savings loss in two ways.
First, if you take a 401(k) loan, you are subject to double taxation on the interest. While any money borrowed is tax-exempt, the loan interest is repaid with after-tax funds. When you withdraw your funds in retirement, you are taxed again. Also, if you leave your job or are fired, you must pay back the loan in 60 days, regardless of the amount. If you don’t, you are subjected to income tax and a 10% penalty if you are under 59½.
Except for certain circumstances, early contribution withdrawals from a traditional IRA will also result in a 10% penalty and taxes. Roth IRAs have more flexibility and allow you to withdraw contributions without penalty, but not without long-term consequences.
Second, and most importantly, when you draw from your retirement savings to cover a debt or expense, you lose out on the growth potential and compound interest. Depending on how old you are, you may never be able to rebuild your savings. It may seem convenient to use your retirement savings in this way, but you are robbing your future retirement to do so. Instead, create an emergency savings account and tell yourself that your nest egg is off limits.
If you are 70½, you must begin taking required minimum distributions (RMDs) from your traditional IRA and employer-sponsored retirement accounts. It doesn’t matter if you need the money when you reach this age, you must adhere to the RMD rules. What happens if you don’t follow through? The IRS will charge you an excess accumulation penalty of 50%! That can significantly harm your retirement savings amount. As an example, if you are required to withdraw $5,000 and don’t, you will owe a whopping $2,500. That’s an unnecessary and avoidable loss. To make matters worse, if you don’t have the penalty amount available through an emergency fund, you may be forced to use your retirement savings to cover it, further damaging your future financials.
Diversification is one of the most talked about investment strategies for a reason. It protects your investments from market volatility. While you can’t eliminate risk from your portfolio entirely, you can cushion the blow if things go south. If you put too much of your money into one stock or even one sector of the economy, you put yourself in danger of losing your retirement savings. Mix it up with global exposure, alternative investments, and a portfolio that isn’t too stock heavy. Look at the big picture of all your accounts, including employer-sponsored ones, and ensure you are diversified across the board.
If you don’t partner with a trusted financial professional, you could be putting your money in a perilous position. An advisor can help you stick to a long-term strategy, keep emotions at bay, and provide you with guidance and advice that you can’t put a price on. As independent financial advisors who specialize in guiding people through their Second Growth phase of life, a time of protecting, growing, and transferring your wealth, our number one goal is to provide peace of mind and certainty that your needs will be met in retirement. To take the first step in protecting your hard-earned retirement savings, contact one of our offices today for a complimentary consultation.
About Cypress Wealth Services
Cypress Wealth Services, an independent RIA firm providing financial planning and investment management to high net worth individuals, families, business owners, and institutions. CWS is comprised of professionals with diverse backgrounds and extensive experience and qualifications. CWS is uniquely qualified to serve a broad range of client needs. Their experience and expertise act as a foundation for their client service process, The Second Growth, which focuses on efficiently protecting, growing, and transferring to their loved ones the wealth and legacy a person has already built. With offices in Palm Desert and Anchorage, the firm serves clients across the country. Learn more by visiting www.CypressWS.com.