Retirement is a time like no other, when you reap the rewards of a lifetime of hard work, saving and sacrifice. But whether you’re about to retire, or already enjoying your “golden years,” you want to make sure your nest egg keeps up with the demands of your lifestyle. In other words:

You don’t want to outlive your nest egg!
Your nest egg most likely represents a large amount of money held in a variety of investment and retirement accounts — more money than you’ve ever had at any other time in your life. Over the course of your retirement, you’ll have to make many decisions about these important assets:

  • How can I meet my monthly retirement income needs?
  • What are the best tools to protect my estate?
  • What are the best strategies for preserving my money against taxes and inflation?
  • How can I protect myself against rising health care costs and the prospect of long-term care?

With all the bewildering choices, it’s no wonder mistakes are made!
The financial decisions you make about your savings and investments are more critical now than at any other time in your life. Wrong choices could mean hefty tax consequences, a significant loss of your purchasing power over time, or worse yet, spending all your assets on long term care.

The following “10 Mistakes To Avoid” can help you prepare to make decisions about your retirement needs and how to meet them. Not only will you learn what not to do, but you will also gain insight on how to make smart choices with your nest egg, and truly enjoy your retirement!

Mistake #1: Thinking Short Term
Many retirees choose short-term investments when they still have 10, 20 or more years of retirement living ahead of them. They put their money exclusively into short term CD’s1 and money market accounts, investments that don’t provide the growth potential necessary to outpace inflation and help ensure they won’t outlive their nest egg. Inflation and taxes already reduce the return of one’s investments and have an even greater effect on investments that offer lower returns such as CD’s and money market accounts.

A diversified portfolio of various classes of stocks, bonds and other equity investments may be appropriate for an investment horizon of 10 years or more. These investments have the growth potential needed to outpace inflation and achieve superior returns over CD’s and money market accounts. Additionally, these instruments may pay dividends, producing even greater income potential to provide for your retirement needs! However, these investments are subject to more risk in order to seek the higher return; principal and yield will fluctuate and may lose value. Although a portion of an investor’s portfolio can also be allocated among income producing investments and other non-growth oriented investments, depending on one’s risk tolerance and investment objectives. Of course, past performance is no guarantee of future results but a 10-year time horizon has been long enough, historically, to ride out market dips.

There Is A Difference Between Investing and Saving
It’s amazing how many people will keep ALL of their money – 100% of it – in a savings or money market account, just to be sure they can get their hands on it whenever they want to. In the end this strategy has the complete opposite effect. It isn’t realistic to try to accomplish long-term goals with short-term methods. It is normal not to want to tie money up for years in something you truly can’t get to. On the other hand, it may not be beneficial to leave all of your money lying around in very short-term savings.

A well-managed investment portfolio takes into account how much you should keep in highly liquid and less liquid assets. This way, in emergencies, there is always a contingency plan for accessing the needed money to meet a crisis. If you are concerned about matters such as these, be sure to pass them on to your advisor.

Mistake #2: Not Anticipating The Rising Cost Of Inflation
Cost of living increases don’t stop when you retire! Consider this as well, my wife is looking to buy a new van and without question, it’s going to cost more than last year’s model. Remember how much a car cost 20 years ago ‹ or a home ‹ compared to today? And medical and nursing home costs continue to go through the roof.

For example, over a period of ten years, a 4% annual rate of inflation rate can whittle down the purchasing power of $100,000 to $66,483. At 6% over 15 years the purchasing power of $100,000 is reduced to only $39,529!

While you are working you can count on salary increases to make up the difference but during retirement it’s different. Fixed pensions are not adjusted to keep up with inflation, so each year the pension income buys less than the year before.

You need to rely on your nest egg and that means it has to continue growing so it can keep up with inflation and continue to provide for you in the style you desire. It’s critical that your nest egg is invested so that it grows faster than inflation.

Mistake #3: Putting All Of Your Money Into A Single Investment Class
Diversifying your investment mix is designed to enhance your returns without increasing risk, however, diversification doesn’t guarantee a profit. But it takes the right kind of diversification. This is the single biggest factor in creating the kind of portfolio that you are comfortable with during good times and bad times, and one that will meet your short and long term financial needs.

However, with many retirees, diversification means putting all their money into a variety of CDs or Treasury Bills with different maturities (1 year, 5 year, etc.) at several different banking institutions. While that may appear to be a prudent strategy, it does not provide the diversification within asset classes to manage risk and offset inflation. Even well into retirement, you should maintain a diversified investment mix (stocks, bonds, CDs) — and then continually monitor the mix so that you can adjust the mix as your needs change.

Just because you have money in stocks, bonds, CD’s and other equity investments, doesn’t automatically mean you have a “well diversified’ portfolio either. You see, different types, or classes of investment will react differently to events that affect the markets. The key is putting the right assets together in the correct proportions so that declines in the value of one asset class are offset by improvements in other asset classes in your portfolio. If set up correctly in the beginning and then continuously monitored, a portfolio that suits your particular needs can be created and maintained throughout your retirement.

Because this requires constant attention and ready access to market information, many retired people place their investment portfolio with a Registered Investment Advisor, like Townsend Retirement Specialists. With professional portfolio management, the odds are much better a client’s assets will survive in this constantly changing market environment.

It just makes good sense to take the time now to begin periodic reviews of your current savings and/or investments. It could well make the difference between keeping your money working hard for you throughout your lifetime, or running the risk of outliving your nest egg!

Mistake #4: Taking A Company Retirement Fund Distribution In Cash
At retirement, people are faced with a flood of confusing taxes rules and payment options for taking distributions from their company pension or retirement savings. Many put off a decision on regular distributions for living expenses and just take the entire value out in cash thinking they’ll decide on long-term distributions later when they get a better feel for their needs during retirement. This is called a lump sum distribution.

Much to their dismay, however, those who opt for a lump sum cash payment will find two dire consequences:

  1. They lose the tax-deferred treatment of earnings on these funds, which will have significant long-term effects on their portfolio.
  2. Uncle Sam takes a whopping 20% off the top in withholding taxes.

It’s almost impossible to correct this mistake once it’s made. You can’t get the 20% withholding back until you file your income tax for that year. But to retain tax deferred treatment for these funds, you must place the entire amount of the distribution in an IRA within 60 days following the distribution. That means you have to somehow come up with the 20% Uncle Sam took off the top and add that to what you actually received and deposit the sum in an IRA account.

The best way to avoid this is to make arrangements to transfer the entire value of your pension or retirement savings account into an IRA. This is called a rollover. Uncle Sam doesn’t take 20% off the top and you maintain the tax-deferred status of the entire amount. Now, you and your financial advisor can take whatever time is required to decide how best to invest the distribution and when and how to withdraw funds to support your retirement living expenses.

For many people, this is one of the most important financial decisions of their life. But there are ways to recover if a mistake was made. There may still be ways to reduce the tax burden, or, if time remains, to convert the entire transaction to a tax deferred rollover. In any case, facing these decisions or correcting them, professional assistance will help you make the right decision for your portfolio. If you face such a situation, call and schedule an appointment at the earliest possible time — and let someone on our team know the situation so that we can get you right in.

Mistake #5: Tapping Your Retirement Income Sources Too Early
Many retirees think they must begin taking distributions from all their sources of retirement income (company pension, Social Security, annuities, life insurance, IRAs, etc.) right away.

Allow Tax Deferred Funds To Compound As Long As Possible
While it’s true that you may have to start drawing from your company pension immediately upon retirement, other tax deferred retirement savings, such as annuities, IRAs, 401(k) plans should be left intact as long as possible. Thanks to their taxes-deferred status, their value grows far more over time than funds held in personal savings. The bigger these accounts get, the longer they can provide the income you need to sustain you through retirement.

Set up your investments so that you withdraw funds in the most tax advantage way and receive only the income you need. Let the rest grow and compound as long as possible. Since everyone’s situation is different, you should consult a tax advisor for specific tax advice.

Maximize Returns From Your Social Security Benefits
Since most Americans are eligible to receive Social Security benefits as early as age 62, many retirees assume they must automatically begin receiving benefits as soon as they are eligible. However, the longer you defer receiving these benefits, the higher the amount of your monthly check.

For example, if instead of starting benefits at age 62, you wait just three years until age 65, you’ll get 20% more from Uncle Sam, in addition to the annual cost of living increases.

You do have choices when it comes to Social Security. Decide when to start taking benefits based on your income needs, not on your age and eligibility status. Take the time to examine all facets of your life before making this decision (your current health conditions, life expectancy, ability to continue to work, etc.) and be sure and run it by us, for a second opinion.

Mistake #6: Forgetting About Taxes
Many retirees assume that if they are no longer earning a full time salary, taxes won’t be a big concern. Let’s face it — taxes are always a concern. And, unless you plan to substantially reduce your standard of living at retirement, it’s likely you’ll still face a considerable tax burden.

While you may not be bringing home a paycheck, you still have income and may also be drawing on your money from your portfolio. Income, including a portion of your Social Security benefits, will be subject to ordinary income taxes. In addition, all tax-deferred money is treated as ordinary income when withdrawn from your portfolio.

With fewer deductions, you could find yourself paying more taxes then when you were drawing a paycheck.

As a financial investment advisor, we can be helpful by developing strategies for your investments which manages the taxes you must pay while meeting your income needs during your retirement years.

Mistake #7: Relying On Medicare Or Medicaid To Cover The Tab
The cost of long-term health care, whether provided in the home or in a skilled care facility, can place an unbearable financial strain on families. Many retirees do little or nothing to prepare for this potential expense. They assume those expenses will be picked up by Medicare or Medicaid.

Wrong!

Medicare coverage is generally limited to 150 days then only if admission follows a hospital stay. Medicaid assistance will only pick up the tab AFTER ALL OF YOUR OTHER ASSETS HAVE BEEN EXHAUSTED (I.E. YOUR LIFE SAVINGS HAVE BEEN SPENT)

Specialized long-term care insurance plans are available commercially to help with these costs, but the costs have to be factored into your retirement spending plans.

Careful planning is essential in preparing for this contingency. Set up your assets so they are ready to continue working for you, should you need long term or nursing home care. We can help you explore supplemental insurance options and determine the best long-term solution for your personal needs.

Have your money working the best possible way it can. Then, if you do not have to go to a nursing home — GREAT!! But, if you do have to go, you will have protected your assets so that they will last as long as possible.

We can actually incorporate certain strategies that will protect your assets and at the same time, work right in line with your other financial needs.

Mistake #8: Relying On A Will To Safely Pass Along Assets To Your Heirs
A will is important for naming a guardian for your children and for expressing any particular wishes you have regarding disposition of your estate, but it won’t protect your assets from costly probate or estate taxes. There are ways to employ specific investment vehicles and/or trusts that have rights of survivorship so that your estate will pass automatically to your heirs at your death. With tools such as these, you can maintain control of your assets while you live under certain trust arrangements, but still reduce the estate tax burden and/or costs and delays of probate.

On the other hand, don’t automatically assume you need a trust or any other estate-planning tool, just because a friend or family member uses it!

Probably the only thing that would hurt worse than having no estate planning done at all, would be to pay for something, and then find out (or have your family find out — since you may not be there) you spent the time, money, and effort on something that wasn’t necessary — or created even more problems! We recommend consulting with an Estate Planning Attorney for the drafting of wills and trust documents.

Don’t leave these things to chance. Work with an experienced and knowledgeable Financial Advisor to develop plans and strategies that work best for your situation.

Mistake #9: Not Having A Sound Investment Strategy In Place
Fact: 94% of all Americans will not be able to maintain their standard of living after they retire! (According to the Social Security Administration, 2003).

It amazes me how many people I meet with who don’t have a real investment strategy in place even though they claim to be working with a financial consultant of some kind. They might have a general idea of what they want but do not have a personalized way of how their money will be invested. Much less a comprehensive financial plan detailing what kind of risk they’re taking and what kind of return they can expect t get, based upon where their money is currently invested.

Three-Step Process To Find The Best Portfolio For YOU!

We have found, as important as it is to be thorough, nothing will get done unless it’s simple enough to understand and implement. Our three-step approach begins with a thorough evaluation of your needs and goals and selecting the model portfolio that is exactly right for you.

Once the planning is complete and a portfolio designed for your long-term success, you need the ability to track how you are doing and assure that you are headed in the right direction. This is Step Two. We deliver an easy-to-understand, yet comprehensive report to our clients every three months that gives them all the facts they need to make these important assessments.

Just as you wouldn’t neglect regular medical checkups, it is equally as important to have periodic financial checkups with your Financial Advisor. Step Three includes educating you on the changes necessary in keeping your investment portfolio current and up-to-date, we can also inform you of any new tax law changes and recommend new opportunities that make the most of your investments or reassure you that everything is on track with your retirement goals.

These three steps could mean the difference between worrying about outliving your nest egg or enjoying the good life you’ve worked hard for!

Mistake #10: Not Understanding The Key Characteristics and Differences Between a Registered Investment Advisor and a Broker
Over the years I’ve discovered there are a lot of misconceptions regarding investment advice. This is why I list not understanding the difference between a broker and an Investment Advisor, as a mistake. It’s critically important to get sound advice, and you are the one who must make that determination.

Anyone acting solely as a broker is, by definition, being compensated to complete a transaction, they collect a commission for each sale or trade. This is the only time they are paid, and the more transactions they can create, the more they are paid.

On the other hand, an Investment Advisor is typically compensated based upon the value of your portfolio. The better you do financially, the better your advisor does financially. An advisor has a vested interest in helping a client create and achieve long term goals and create as much wealth along the way as possible.

At Townsend Retirement Specialists, we are Investment Advisor Representatives. We only make a change in a client’s portfolio if it is in the best interest of the client and will help to meet their investment objectives. This is designed to ensure that the client’s money is managed properly. We receive no benefit for making any of these changes, other than working towards the goal of growing their portfolio. The key difference between a broker and an advisor amounts to this:

  • A broker is paid on creating activity, regardless of benefit for the client.
  • An advisor is compensated for creating value — which is directly in line with the client’s best interest.

Now, here comes a damaging admission, you may think I’m crazy for making:
We May Not Be The Right Ones For YOU!!!

Quite honestly, we don’t pretend to be the right choice for everyone. Let’s face it, there are a lot of different kinds of needs, and a lot of different firms out there for people to choose from.

So, if it’s important to you to work with a large, nationally recognized firm, one with a dozen or so brokers sitting in the same office, side-by-side, all delivering the same kind of information, then we’re not the right ones for you.

And, if you like the idea of being “hooked” up with someone locked into the “conventional wisdom of Wall Street” selling whatever the home office says to sell, then again, we’re not the ones you’re looking for.

We are quite clearly not a trading firm, one which buys and sells stocks on a daily basis, making a living from commissions on those transactional costs. So, if you’re looking for the latest “Hot Tip” on what to buy and trade in order to generate “unbelievable returns,” we’re still not the ones.

But, if you’re looking for someone willing to listen to you, one-on-one, to understand your concerns and needs; and someone willing to put their recommendations on paper to show how they plan to put a real strategy in place designed to help you achieve your goals; well, then we may very well be the right ones for you.

If you’ll trade the hustle and bustle of a large brokerage firm for a small, quiet, confidential advisory firm, set up to deliver personal attention to your needs, then you’ll like us just fine.

And, if you enjoy the idea of working with a real advisor, compensated on creating value and not transactions, one that has a vested interest in helping you, and can rightfully say, “The better you do, the better I do,” then I’d like to make you a special offer. I would like to show you exactly what we mean by conducting an in-depth analysis of your goals and needs and creating comprehensive plan geared specifically to realizing your goals and dreams.

To take advantage of this special offer and receive a free consultation, please call us today toll-free at 303.452.5986 or 1.800.578.9896 or fill out our brief Inquiry Form, and we will get in touch with you to discuss your specific needs.