Avoid costly retirement mistakes

Consumer Reports magazine: March 2012

The shaky economy has caused many Americans to rethink their retirement plans. Some say they’ll put off retiring and try to save more money. Others say they don’t expect to retire, either because they don’t want to or they can’t afford to.

While none of us can control the economy, you can take steps to increase the odds of a successful retirement on whatever timetable you choose. That’s one key takeaway from the Consumer Reports National Research Center’s survey of retired and soon-to-be retired online subscribers conducted last fall. Our fifth such survey since 2007, it asked 21,714 people from 55 to 75 what they did right or wrong in preparing for retirement.

Starting too late and saving too little topped the retirees’ list of regrets. But several less obvious mistakes also emerged from our survey data:

Underestimating expenses

Nearly a third of the retirees we surveyed said their expenses were greater than they had anticipated before retiring, while only 11 percent said their expenses were lower. That turned out to have a significant bearing on how satisfied the retirees were overall. Adjusting for the effects of other significant variables, our survey analysts estimated that 76 percent of retirees whose expenses didn’t exceed their expectations were highly satisfied with retirement. For those whose expenses proved to be higher, the number dropped to 56 percent.

What to do: Make a comprehensive list of all your current expenses, cross out those that will end when you retire, and add any new ones, including fun stuff such as travel. Before you retire, consider living on that budget for six months to a year just to see if it’s a comfortable fit. And don’t be surprised if your retirement expenses actually exceed your preretirement ones, at least for the first few years.

Investing too conservatively

Retirees who characterized their overall investment style as conservative reported median savings of $478,000, compared with $617,000 for their aggressive counterparts. Readers who considered themselves moderate risk takers fell between those two groups, with $563,000.

What to do: If you’re saving for retirement and all your money is in conservative investments like CDs, money-market funds, and bonds, you might want to add stocks or stock funds to the mix. Financial planners generally suggest retirees also maintain a reasonable exposure to stocks, in part as an inflation hedge. For example, if you were to put $100,000 in a five-year jumbo CD paying a recent interest rate of 2.65 percent, and inflation continued at its recent pace of around 3.5 percent, your investment would lose about $4,800 in value by the end of five years, according to the Consumer Reports Money Lab.

Not diversifying enough

We asked readers who said they planned to retire by 2015 what investment vehicles and asset classes they had used to save. Their choices included 401(k) and 403(b) plans; their homes; IRAs; saving accounts and CDs; stocks, bonds, and mutual funds held outside a retirement plan; and half a dozen other options. Adjusting for the effects of other variables, readers with three or fewer types of investments reported median retirement savings of $246,000, compared with $539,000 for those with seven or more types.

Of course, people who have more money might be expected to have it in more places. But the finding held true across income levels, and people with lower incomes who diversified widely often accum-ulated more than those with higher incomes who didn’t. For example, people with incomes under $85,000 who used seven or more investment types reported median savings of $368,000; those with incomes of $125,000 to $199,999 and money in three or fewer places had $315,000.

What to do: If your money is in just a few investments, now might be the time to broaden your horizons. If you need help, consider consulting a fee-only financial planner, who can model different allocations based on your risk tolerance and likely retirement date. You can get names from the National Association of Personal Financial Advisors (www.napfa.org).  

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