Retirement planning occurs over the course of several decades, but even with the benefit of time, people still make avoidable errors, one expert said.
Larry Swedroe, chief research officer at Buckingham Wealth Partners, joined Yahoo Finance Live and shared the top mistakes people make when planning for retirement. And the two biggest offenders, he explained, are overestimating returns and ignoring risk.
“We think that’s a real problem for people, overestimating the expected returns they’re likely to get,” said Swedroe, author of “Your Complete Guide to a Successful and Secure Retirement.”
Relying too heavily on historical evidence is how people get pinched because market returns have fluctuated over the years and don’t come with any guarantee. An overestimation or miscalculation means the difference between a financially comfortable retirement and scrambling in your golden years.
Over the last 38 years, stock trends saw returns of 10% and bonds with 6%, so a diversified portfolio earned about 8.5% per year — with some years seeing over 10% returns, Swedroe explained.
“Well, today you simply can’t get there,” he said. “Stock price-to-earnings ratios are roughly twice what they were.”
Since timing is everything but no one has the benefit of knowing the future, the second commonly made mistake is ignoring “sequence risk,” or the danger associated with retirement account withdrawals in a down market when the value of your investments has taken a hit, he said.
Planning with the expectation that there will be economic downturns, but if your entry to retirement collides with a 2008 or 2000-2002 type of event when markets collapse and “just crash in the first year or two,” Swedroe said that you can’t plan for annual 4% or 5% a year withdrawals.
“That could blow up in your face,” he said, “because the losses happen and you’re withdrawing from a portfolio and you can’t recover.”