The 5 Biggest Investment Mistakes People Make Before Retirement
The years leading up to retirement can be some of the most important years in your financial life.
You may have spent decades saving into a 401(k), IRA, pension, brokerage account or other investments. But as retirement gets closer, the strategy that worked while you were building wealth may not be the same strategy you need when you're preparing to live on that money.
Small mistakes can become much more significant when you have less time to recover from them.
Here are five common investment mistakes people make before retirement—and why planning ahead matters.
1. Taking Too Much Investment Risk
Many investors become comfortable with aggressive portfolios during their working years.
That may make sense when retirement is still decades away. But as retirement approaches, a major market decline can become more difficult to recover from—especially if you need to begin withdrawing money at the same time.
This doesn't necessarily mean selling all your stocks or becoming extremely conservative.
It means understanding how much risk you are actually taking.
Questions to consider include:
How much of your portfolio is invested in stocks?
Are you heavily concentrated in one company or sector?
How would a 20% or 30% market decline affect your retirement plans?
Would you still be able to retire on schedule?
How much of your portfolio will you need during the first few years of retirement?
The right level of risk depends on your goals, income needs, time horizon and overall financial situation.
2. Becoming Too Conservative Too Soon
Taking too much risk can be a problem.
But taking too little risk can also create challenges.
Retirement could last 20, 30 or even more years. During that time, inflation can reduce the purchasing power of your money.
Keeping too much money in cash or very conservative investments may feel safe in the short term, but it can potentially make it harder for your portfolio to keep pace with inflation over a long retirement.
The goal is often to find an appropriate balance between:
Protecting the money you'll need soon and allowing part of your portfolio the opportunity for long-term growth.
That balance will be different for every investor.
3. Not Having a Retirement Income Plan
Saving for retirement and creating retirement income are two different challenges.
While you're working, you're usually putting money into your accounts.
After retirement, the process reverses.
Now you may need to determine:
How much can I withdraw each year?
Which account should I withdraw from first?
When should I take Social Security?
How will pension income fit into my plan?
How will taxes affect withdrawals?
How much cash should I keep available?
What happens if the market falls?
Simply having a large investment account does not automatically mean you have a retirement income strategy.
A good retirement plan should help connect your investments with your expected expenses and other income sources.
4. Ignoring Taxes When Making Investment Decisions
Taxes can have a significant effect on retirement income.
Many retirees have money spread across different types of accounts, including:
Traditional IRAs
401(k)s
Roth IRAs
Brokerage accounts
Savings accounts
Pensions
Social Security
These accounts can receive different tax treatment.
For example, withdrawals from traditional retirement accounts are generally taxable as ordinary income, while qualified Roth IRA withdrawals are generally tax-free.
The order in which you take withdrawals may affect your tax situation, future Required Minimum Distributions and potentially other retirement costs.
Investment decisions should therefore be considered as part of a broader financial plan rather than in isolation.
Tax situations vary, so investors should consult with qualified tax professionals when appropriate.
5. Making Emotional Decisions When Markets Fall
Markets will not always cooperate with your retirement timeline.
One of the biggest mistakes investors can make is abandoning a long-term investment strategy because of short-term fear.
When markets decline, it can be tempting to sell investments and move everything to cash.
The problem is that investors who sell after a decline may lock in losses and then face another difficult decision:
When do I get back into the market?
Trying to consistently predict market tops and bottoms is extremely difficult.
A better approach is usually to have an investment strategy that anticipates periods of market volatility before they happen.
If a normal market decline causes you to panic, your portfolio may be taking more risk than you're comfortable with.
Bonus Mistake: Waiting Until Retirement to Start Planning
One of the biggest retirement mistakes may actually happen before any investment decision is made:
Waiting too long to create a plan.
Ideally, retirement planning begins several years before your last day of work.
That gives you time to evaluate questions such as:
Am I saving enough?
When can I realistically retire?
How much retirement income will I need?
Should my investment allocation change?
When should I take Social Security?
What will healthcare cost?
How will Medicare fit into my plan?
Do I need to adjust my 401(k) or IRA strategy?
How will I handle a market downturn?
What happens if I live longer than expected?
The closer you get to retirement, the more these decisions begin to interact with each other.
Your Retirement Portfolio Should Have a Purpose
Before retirement, investing is often focused primarily on accumulation.
After retirement, your investments may need to do several jobs at once.
They may need to provide:
Income
Growth
Liquidity
Inflation protection
Risk management
Financial flexibility
That means your retirement portfolio shouldn't simply be a collection of investments.
It should be part of a larger plan.
How Strategic Investment Services Can Help
At Strategic Investment Services, we help clients look beyond individual investments and understand how their entire financial picture fits together.
Depending on your situation, retirement planning may include reviewing:
Your current investment allocation
Retirement accounts
401(k)s and IRAs
Pension benefits
FRS benefits
Social Security
Expected retirement expenses
Retirement income needs
Medicare considerations
Risk tolerance
Long-term financial goals
Our goal is to help you understand where you are today, where you want to go and what steps may help you move toward that goal.
There is no single investment strategy that works for everyone.
Your retirement plan should reflect your income needs, your investments, your timeline, your family and your goals.
Planning for Retirement? Start Before You Get There
If you're within a few years of retirement—or you're simply unsure whether your current investments are positioned appropriately—it may be a good time to review your financial plan.
The best time to discover a potential problem is usually before you retire, not after.
Contact Strategic Investment Services to schedule a retirement and investment review. Schedule Your Virtual Meeting Now!
We can help you evaluate your current strategy, identify potential gaps and develop a plan focused on your financial future.
Important Disclosure
This material is provided for general informational and educational purposes only and should not be considered individualized investment, tax or legal advice. Investing involves risk, including the possible loss of principal. Asset allocation and diversification do not guarantee a profit or protect against loss. Individual circumstances vary.