Top 5 nest egg mistakes
Want to retire rich? Then make sure you
steer clear of these land mines
By Staff Writer Martine Costello
May 12, 2000: 4:42 p.m. ET
NEW YORK (CNNfn) - You can lose weight, get a new job or find religion. But
when it comes to retirement planning, there are no do-overs in life.
If you make mistakes with your long-term portfolio, you'll pay for it when you
need it most - when you want to be riding in a golf cart or sailing the Caribbean.
It will cost you thousands, perhaps millions, of dollars. It means you will have
to work part-time, change your lifestyle, or even delay retirement by years, if
not decades.
So you chase performance? Don't diversify? Maybe you're charging that
summer trip to Europe on your credit card? Or maybe you're not putting any
money away at all? Chances are good you'll be pinching pennies and cutting
coupons when you retire.
"The single biggest mistake people make is
paying too much attention to their
investments," said Gary Belsky, author of
"Why Smart People Make Big Money Mistakes."
When you spend too much time focusing on your portfolio, chances are you're
chasing the latest winners that are making news on Wall Street, he said. But
that means you'll be selling the losers from your portfolio for the winners that
are trading at a premium.
Performance-chasing is especially true with mutual funds, Belsky said. For
example, between 1984 and 1995, the average stock fund earned 12.3 percent.
But the average stock fund investor earned 9.7 percent. (Click here to check
your mutual funds).
"What happens is people are chasing the hot funds," Belsky said. "But you
can't pick winners."
By contrast, with stocks, investors tend to sell winners so they can "lock in"
their gains. They're so afraid of losing they'll actually cut short a good run.
"I'm saying you should be buying stocks and holding onto them for a long
time," Belsky said. "If you're invested in it, it shouldn't matter if it's losing. You
shouldn't be looking at it for 20 years. If you keep putting money into the stock
market and don't look at it - those people get rich."
Another big mistake is to forget about diversification, investing pros said.
A diversified portfolio means you're
covered across broad asset
classes, so if one part of the
market is out of favor, another part of the market is doing well.
Most recently, it's been common for investors to be overweighted in technology.
With the Nasdaq composite index down 16.8 percent year to date as of May
10, that can mean staggering portfolio losses.
"A lot of people got caught badly with technology stocks," said Elaine Collins,
a certified financial planner and president of Collins Financial Planning Services
in Libertyville, Ill. "You never know when the bottom is going to fall out."
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The advantage of diversification is it reduces risk, Collins said.
"We always want to have our money in different segments of the market
because these segments grow at different times," Collins said. "You want to be
in a part of the market before it takes off."
Deciding on a good asset allocation plan will depend on your specific situation
and goals, she said, including your age and whether or not you have a pension.
Lou Stanasalovich, a certified
financial planner and president
of Legend Financial Advisors in
Pittsburgh, recalled in the
1960s that many investors
were smitten with the so-called
"Nifty Fifty" growth stocks. But
when the market changed,
value outperformed growth
10-to-1 over the next 12 years.
People who were overweighted
in growth saw their portfolios lose more than half their value.
A recession will be devastating for people who have grown too used to a bull
market, Stanasalovich said.
"People are getting too comfortable with the way things are," Stanasolovich
said.
Mark Groesbeck, a certified financial planner with Stanford Group in Houston,
said another problem is when you don't do any planning at all.
For example, Groesbeck recalled a story
showing how planning makes a
difference. Two 55-year-old men came
into his office one day asking how they could retire in 10 years. The first man
was a doctor wearing an Italian suit who made $250,000 a year. The second
man was in overalls, a janitor who earned $40,000 a year.
The doctor had $2,000 in an IRA, $5,000 in a checking account and
$20,000 in credit card debt. His house was mortgaged 90 percent after
he recently refinanced and spent all of the money. He even leased his
car.
The janitor had no debt and had dutifully saved about 15 percent of his
salary every year, with $500,000 in his 401(k).
"I told the doctor I'm not sure he can retire in 10 years," Groesbeck said. "I
talked to him about changing his lifestyle. But the janitor could retire in 10
years."
In another case, Groesbeck had a client who had no idea he could sell his
business and retire earning the same income. The client, a 70-year-old from
Houston, had a small Navy pension that would pay $10,000, $300,000 in his
IRA, and expected to earn $24,000 in Social Security.
"People get so busy working on their lives that they don't slow down enough to
see if they are reaching their goals," Groesbeck said. "Many people don't
coordinate their financial planning like they should."
Stanasalovich, from Pittsburgh, said very few people have a financial plan that
outlines their goals. Taxes, estate planning, and inflation all play a part.
"For many people it's spend, spend, spend," Stanasalovich said. "It's important
to cover all of the bases. People may address one aspect, investing, and they
think they're OK."
And debt can eat away at the best
intentions, investing pros said. If you have a
lot of credit card debt and you only make
the minimum payments, you'll never pay it off and your purchases will cost you
thousands of dollars more.
Belsky, the author, said the average American has $7,000 in credit card debt
and about $7,000 in "short-term" money in some type of savings account. The
credit card debt will cost them about $180 for every $1,000, while the
short-term savings account will earn just 2.5 percent, or $25, for every $1,000.
A lot of people will build up the so-called "emergency fund" - the amount of six
months' living expenses - instead of getting rid of that devastating credit card
debt, Belsky said. But it would be better to use the cash to pay off the debt
and use the credit card for emergencies.
Belsky will appear on CNNfn's Your Money on CNN at 7:00 a.m. and 4:30 p.m.
Saturday and 2:30 a.m. Sunday.
Of course, even making mistakes with your investing is better than not doing
any investing at all. If you put off saving for retirement, you'll eventually get to
the point where you can't make up the difference.
Collins said young people often can't imagine
a time when they'll be retired and in need of
cash.
And the longer you wait to get started building your nest egg, the more you will
have to put aside. That will mean major lifestyle changes, whether it's less
traveling, selling assets, or penny-pinching.
"The future seems so far off," Collins said. "But what mom always said is true:
Time goes by a lot faster as you get older." |
