That’s why Certified Financial Planner Dana Anspach, based in Arizona, put together a list of her top “10 ways to wipe out your retirement savings.”
Anspach, who frequently writes about money issues for the over 50 crowd, focused on those devastating money missteps that are easy to avoid but hard to recover from.
Anspach says that, over the years, she has “watched people lose money in almost every way imaginable.” Looking back on our twenty-plus years in the business, we would have to agree.
Here are some of the top items on the list of what not to do when you are saving for retirement.
Believe, but not too much
When Anspach worked for a CPA firm, she had clients working for Intel with the bulk of their money tied up in that one stock. Her warnings about the dangers of holding too much in one company fell on deaf ears. Unfortunately, when the price of the stock dropped, those clients’ retirement nest eggs shrunk from super-sized to skimpy.
Clients often resist selling their favorite holdings, arguing that they don’t want to take capital gains, or that they’re waiting for the price to go higher. In our practice, the common refrain is, “Why sell? It’s doing so well.”
That’s exactly the problem. Those big stock holdings always seem to do well. That is, until the day they suddenly crash and burn, then it’s too late. We can make a list of stocks (Lucent, Enron, AOL, Office Depot, Wachovia) that have caused massive losses to clients who simply held more than was healthy, and refused appeals to cut back.
Warns Anspach, “if trusted advisers are telling you to reduce risk, listen.”
The real estate trap
The infomercials claim that “rental real estate is a good way to build wealth with someone else’s money,” says Anspach, but the truth is that many a smart investor has been done in by real estate gone wrong.
Don’t ever forget the cardinal rule of real estate investing: “It takes deep pockets.”
“When the economy goes down, renters can move out, leaving you with a mortgage payment and no income available to make these payments. If you don’t have the cash flow to cover the mortgage as well as repairs and maintenance, you’ll lose the property.”
That doesn’t mean that real estate is necessarily a bad investment. It just means that you shouldn’t even think of investing in rental real estate until you have a large cash cushion to draw on in a downturn. Real estate is cyclical and prices go up and down. With cash to spare, you can wait for prices to recover. Without sufficiently deep pockets, you’ll have to fold at the first sign of trouble.
Frequent lane changes on the retirement highway cause crashes
It’s a myth, says Anspach, that smart investors watch the market and frequently move money into the latest high performing investment.
In truth, she claims, that type of repeated “lane changing” can lead to big losses.
Some investors seem to always chase the latest, hottest investment (think technology in 1999, real estate in 2005, or gold in 2011). The result? They buy at the peak, then sell in disappointment when prices start to slide, locking in one big, fat loss after another.
Jumping from investment to investment can only slow you down. The best way to keep your money, and grow it for the future, is to stick with a disciplined investment strategy suited to your long-term needs.
Follow the money trail
Anspach, like us, is a fee-only adviser.
She tells about meeting with potential clients and explaining to them that, as a fee-only practitioner, she would not be “compensated by commissions in any way and had a fiduciary duty to give them advice that was in their best interest.” At the same time, she prepared investment projections showing what she thought were realistic investment returns in the range of 6%-7% per year.
Despite her presentation, her prospects hired another adviser. Says Anspach:
“I asked them why they hired the other person. They said it was because he said 12% returns were realistic, while I said to expect only 6%-7%.”
Unfortunately for the clients, the honeymoon with the new adviser was short-lived. He had apparently “invested their entire portfolio — over $1 million — in illiquid investments; two annuities and one privately traded REIT (real-estate investment trust). All were products that paid large commissions to the adviser who sold them.”
In short, lured by the appealing but perhaps unrealistic promise of higher returns, the prospects ended up locked into unmarketable investments and couldn’t get their money back out.
To avoid an ugly retirement meltdown, always ask how your adviser is being compensated, so you can ensure he or she is truly working for you and not just pushing expensive product.
An annuity is not an investment
Don’t ever forget that an annuity is an insurance contract, says Anspach. And always recall that “insurance is a risk management tool — not an investment.”
“You should evaluate annuities as a way to secure sustainable income in retirement — but don’t buy them for their investment potential,” she says.
Compounding the problem, annuities are very complex products that far too many people buy without really understanding what is inside the fancy wrapper.
“Too many people,” writes Anspach, “buy a variable annuity because they misunderstood how the guarantees work.”
Years later, disappointment sets in. We’ve seen many clients frustrated by the high ongoing fees, steep surrender penalties, and low surrender values. They realize they could have done much better putting their money in a mainstream, lower cost investment, and resent having their money “locked away” where they can’t access it freely.
Like the Hotel California, many commissioned annuities are easy to check into, but hard to ever leave. Buying them without thoroughly understanding their pros and cons can sabotage your retirement.
Tips belong in restaurants, not in investments
Stock tips can be dangerous to your financial health.
Investing in a stock or other investment you know little about is not investing, it’s gambling, says Anspach, who admits to losing money herself by listening to other people’s hot tips.
Anspach recounts the story of a “man who bought GM stock during the market crash, thinking he could double his retirement savings. He felt safe with the investment because he had heard through reputable sources that the government would bail the company out. When the stock continued to go down, he bought some more. When it went down again, he bought more. As it bottomed out he realized he’d invested nearly his entire life savings. He panicked and sold it. Soon thereafter, the stock recovered. His life savings, however, are forever gone.”
There are secrets to successful investing – like saving money consistently over time, diversifying your investments, taking considered risks, and sticking with your strategy when the going gets tough.
But leave the hot tips for your waiter or waitress. The truth is that nobody has a crystal ball, and to believe otherwise can be highly detrimental to your bank account.