Retirement

Are We Too Confident in the Stock Market?

August 22, 2018 By Shane 4 Comments

Experts are fond of telling us all about the historic returns of the stock market. But, does our belief in that make us overconfident in the stock market?

You’ll have a hard time finding someone who won’t tell you that the market performs quite admirably over time. It may have it’s ups and downs, but it performs at a rate that touches on double digits for longer periods of time. And, it’s hard to argue with the facts. Take the market for any given 10 or so year period and you aren’t likely to find too many periods where it hasn’t returned a pretty nice rate. Especially when you compare it to the rates of savings accounts and CDs over the same period.

But, there’s shady side to all of that. Our confidence in the ability of the stock market to return those kinds of numbers can sometimes cause us to over-invest our portfolios. Every time the stock market drops significantly (or crashes altogether) we hear stories about the person who was near retirement and now has to work for another 10 years because he/she lost it all in the stock market drop. Invariably, you hear one of the reporters utter something about whether the stock market is as safe as we all make it out to be.

Charging Bull And the truth is, no. It’s nowhere near as safe as some would make it out to be. In fact, it’s down-right risky. And the less diversification you have, the riskier it becomes. Hold all your money, or a significant portion of your portfolio, in one stock and you’re just as likely to suffer a tragic loss than you are to retire rich. Ignore the more conservative professionals who suggest that you should move more and more of your money away from stocks and into something like bonds as you age, and you have a much higher chance of suffering a tragic loss.

Our confidence isn’t entirely misplaced, however. The facts remain that the market does return a healthy rate over time. And as long as you can weather a few down trends, you’re likely to come out on top if you just hold on for the ride. The overconfidence comes when you keep your money in too high of a percentage of stocks as you near retirement age. By the time you are 10-15 years from retirement (about age 50-55) you should have moved at least 50% of your portfolio away from stocks and into bonds. Your investment adviser should be able to help you with that, or you should sign up with a stock advisor service (like the Motley Fool Stock Advisor, or Betterment). When you’re 5 or so years from retirement, you should be closer to 90% in bonds and other safer investments. Yes, these investments are less likely to have high returns, but they also are almost guaranteed to return something. And, as the old saying goes, something is better than nothing.

The bottom line is this. Be aware of the risk of the stock market and that you should begin playing it safer as you near retirement age and you should be ok. Don’t get overconfident in the history of the stock market and it’s giant returns. Most importantly, find an investment adviser that you can trust and, at the very least, get their advice on your portfolio and it’s allocations, and you should find yourself hitting retirement with most of the money you expected to be there.

Image Credit: Charging Bull by kdinuraj, on Flickr

This post originally appeared on Beating Broke on 10/25/2010, and has been refreshed.

Retirement Products: What are the Differences?

February 22, 2017 By Jeanette Marais 1 Comment

There are excellent tax benefits associated with official retirement products, but these products often come with restrictions. Always understand your options and the rules of the product upfront.

Deciding to start investing for your retirement is the first step. Next you need to choose which tools to use. This requires you to compare products and note their differences.

This step can be quite daunting since there are many products available, but the best way to approach this is to consider your needs and level of self-control.

You are locked in, but with tax benefits

Retirement products are the logical choice for most people saving for retirement due to their tax efficiency. The government provides generous tax breaks to encourage people to invest in provident funds, pension funds and retirement annuities (RA) for their retirement. The catch? Your money is not easily accessible before your retirement.
To limit investment risk, retirement products impose limits on the amount that can be invested in higher risk assets such as offshore investments and equities. These rules can hinder your growth, particularly if you start your retirement savings in your twenties.

Do you want accessibility and tax benefits?

The benefits of retirement products compared to tax-free investment (TFI) products have been heavily debated. Both products grow free of income tax on interest, dividends tax and capital gains tax.

The main difference between the two is that retirement products offer you tax savings now. You end up paying less tax now since you make contributions with earnings on which you haven’t yet paid tax. You only pay the tax later once you start drawing an income. This means you defer paying the tax. TFI products are completely tax-free. You invest money after paying tax, but you pay no tax later.

In a TFI product you are allowed to withdraw your money at any time. This is an advantage if you prefer or require accessibility. Remember though that you could also lose out of the effects of compound interest by dipping into your savings and you have an annual and lifetime limit on contributions, which cannot be replaced once withdrawn. It is important to note that using a TFI in conjunction with a normal retirement product could give you greater access to higher risk investments such as offshore investments and equities.

Do you want an investment with no limits?

You could also consider investing directly into unit trusts. Your contributions, like with TFIs, aren’t tax deductible. And, unlike the other two options, your returns will be taxed. This will reduce your returns, but you benefit from the freedom to invest as much as you want to in any assets and have access to your funds whenever you choose. Once again, the temptation to withdraw your money before your retirement might rob you of the benefits of compound interest.

Understanding the rules of a product is essential before you commit to it. Changing midway could have massive tax implications and may even result in penalties. If you’re uncomfortable doing this by yourself then consult an independent financial advisor to help you review your options.

The Five Most Common Retirement Planning Mistakes

November 11, 2016 By Thomas Bawdy 3 Comments

Planning for your retirement very well may be the longest project you ever embrace. Most Americans spend about 50 years of their life working at least part-time, which amounts to a stunning 35% of your total life. It can be tough to envision what retirement will be like, let alone remain on track for multiple decades. Ninety percent of retirees needlessly suffer due to these retirement planning mistakes, so make sure you don’t make them!

Not Having a Retirement Plan

It’s easy to put off retirement planning until tomorrow. Then tomorrow becomes next week, next month, next year, next decade. Sure, it can be tough to look at where you’re going wrong or to realize that you’re not saving enough. But the only way to get your retirement on track is to have a plan. After all, if you do not know how much money you need, you’ll be chronically plagued by a sense of anxiety that you’re not saving enough—even if you’re making great progress.

Not Saving Enough for Retirement

Retirement planning is not magic. There’s no single account that will make planning for retirement easy. Instead, retirement is ultimately about the hard work of socking away money week after week, month after month, year after year—even when you’d rather spend it on something else or are worried about other financial obligations. No time is more valuable than now, because beginning now means benefiting more from interest payments than you will if you wait another five years. Thus failing to save enough money is the single most significant retirement mistake.

Counting on Government Programs

Medicare and Social Security are great benefits in retirement, but there is no guarantee they will be there forever—and there’s certainly no guarantee that you can expect the sort of payments your parents are currently getting or once received. Don’t count on these programs to supplement your income, and don’t factor them into your retirement plan. Instead, hope that they’ll be there. If they are, then you’ll have a nice cushion you can use to do something fun, rather than jut keeping you afloat.

If you’re nearing retirement and concerned about paying your bills, it’s fine to take into account Social Security and Medicare. You may also want to look into reverse mortgages, which offer reliable income with no requirement that you repay the loan. You need only be over the age of 62 and to own your own home.

Waiting for a Convenient Time to Save

Saving money is always difficult. When you’re 25, you’re probably broke. At 35, you may be starting a family or buying your first home. By 45, you might be concerned about saving for college or supporting your parents. Don’t wait for the right time, or you’ll wait right through retirement. Start saving today. Even if all you can afford is a dollar a week, some savings is better than none at all.

Wasting Your Money

It doesn’t matter how great the investment seems. If you spend more money on the financial advisor or investment fees than the investment offers, you might as well light that money on fire. The same is true of employer-matched retirement contributions. If your employer will contribute money to your 401(k), that’s free money! Max out your contributions every year. If you don’t, you’ve abandoned the easiest, lowest stress way to save, and neglected one of the most significant benefits of employment.