Avoid These Money Management Mistakes
for Investing, Retirement & Financial Planning
Money Management Mistake #1:
Not Really Diversifying Your Portfolio
Brokerage & Retirement Accounts
How many brokerage accounts do you have? How many retirement accounts or 401(k) plans, possibly held with former employers? Sometimes, having assets held in a number of different accounts with different companies and advisors can be difficult to manage — and no one really sees the full picture. An individual investor could hold the same type of investment via a mutual fund or fund of funds (generally included for greater diversification) within different accounts held at different companies, and not know it.
An opportune point for consideration: Is your portfolio heavily weighted in bonds? Bond prices tend to fall when rates rise. Why would anyone pay $1,000 for a bond yielding 3 percent if a brand-new bond of similar quality pays 4 percent? A key measure of sensitivity to rising (or falling) rates is the duration of the bond (or bond fund). Duration is based on the time to maturity, yield and the coupon rate. A bond with a duration of 5, for example (with all other things being equal), would lose 5 percent of its value if market interest rates were to rise 1 percent.
Stocks & Interest rates
Stocks can be impacted by rising rates, too. If the increase accompanies a rapidly growing economy, it can bode well for many companies — but some stocks are more interest rate-sensitive than others.
In short, a truly diversified portfolio can help to weather rising rate periods and volatility.
To see how well you’re diversified, take a comprehensive approach. Can you consolidate your various assets, liabilities and other components of your financial life into one central location? That way, it is easy to organize and see your holdings, and track progress toward your financial goals.
Money Management Mistake #2:
Overreacting to Short-Term Market Fluctuations
Market volatility is a term often used to describe the fluctuation of stock and bond prices. Many events can lead to volatile market conditions: economic data, market news, world events, political disruptions, unforeseen catastrophic events, expectations about the future, corporate announcements and more. So while the timing and severity of volatility are often unpredictable, everyone investing toward a long-term goal may experience it at one point or another. The technology bubble burst of the early 2000s, the 2007-2009 financial crisis and the anticipation of a Federal Reserve rate hike are some examples we can likely recall.
Preparing & Reacting
How you prepare for and react to volatility is an important aspect of investment management, as your response (or decision not to react) can affect the market value of your portfolio. When investing for a longer-term goal, like retirement, it's generally easier to weather periods of volatility and NOT react — simply because you have more time to recover from potential losses. But for retirees who rely on investment dollars as income, market volatility is an ever-present threat. Without proper planning, these individuals can run the risk of drawing on more of their principal balance earlier than they would like, or taking more risk with capital they'll need later in an effort to recover from losses.
When Volatility Strikes
Don't panic. One of the best ways to achieve your longer-term investing goals is to carefully create a financial strategy and not sway from it, even when market conditions are not ideal. Sticking to your plan will help you ride out market downswings and preserve your assets.
Money Management Mistake #3:
Relying Too Heavily on Social Security — Especially Early On
As you plan for income in retirement, be sure you understand the role Social Security will play — and how the benefits you’ll receive can fit in with your other retirement income sources.
Financing Your Retirement
You’ve probably given thought to how you’ll finance your retirement. Common sources of retirement income include employer-sponsored 401(k) plans, Individual Retirement Accounts (IRAs), pensions, annuities and more. One of the most popular sources remains Social Security, but the timing of when you choose to claim your benefits can drastically impact the amount you will receive each month.
Additionally, according to PNC’s Perspectives on Retirement survey (August 2015), many are wary about the solvency of Social Security. And given that they can no longer rely on hefty employer pensions during their retirement years, many investors are increasingly feeling a sense of personal responsibility for managing their retirement planning.
As you near retirement, you will be provided with a Social Security benefit statement. This statement will detail your expected monthly benefit amount if you start collecting at your full retirement age (FRA), which is 66 for those born in 1943 through 1954. It will also show another figure, about 25 percent less, if you claim at the earliest possible age (62). Finally, you’ll see a third figure, about 32 percent higher than the FRA amount, if you delay receiving benefits until your 70th birthday. The swing between the 25 percent lesser benefit amount that you may receive for claiming early and the 32 percent gain for waiting makes the age 70 benefit amount roughly 76 percent higher than the age 62 figure.
One of the great unknowns when it comes to claiming Social Security is how long you will live. It makes sense to delay claiming benefits if you think you’ll live long enough, so that receiving bigger benefits later makes up for foregoing receiving benefits over a longer period of time. Higher monthly Social Security benefits may reduce your need to draw on other assets later in retirement.
Married couples have an added incentive for at least the higher earner to wait to claim benefits. When one spouse dies, the survivor’s Social Security benefit will be the higher of his or her own benefit or the benefit of the deceased spouse, including any delayed retirement credits. So, if the higher earning spouse delays to age 70 and dies first, the surviving spouse would step up to his or her benefit, including the 32 percent bonus delivered by the delayed retirement credit.
Money Management Mistake #4:
Not Contributing Enough Toward Retirement
Invest in an IRA
Even if you’re diligent about contributing to your employer-sponsored retirement plan, don’t overlook the opportunity to invest in an IRA. Having a retirement plan at work might impact your ability to deduct IRA contributions, but it does not close the door to the individual retirement account. Using both provides the opportunity to invest more for your retirement.
401(k) + IRA for Added Assets
For 2018, you may be able to contribute up to $5,500 to an IRA (plus an extra $1,000 if you’re 50 or over). Depositing $5,500 a year for 25 years in an IRA that earns 7 percent a year would hypothetically add nearly $375,000 in assets.
Contributing to a 401(k)
For 2018, you may be able to contribute up to $18,500 to your employer’s 401(k) plan, plus an extra $6,000 “catch-up” contribution if you’ll be age 50 or older by the end of the year.
It’s generally advisable to invest in your employer’s retirement plan first, contributing at least enough to capture 100 percent of any employer match. That way, you're not leaving any money on the table. Then, assess your situation and how contributing to an IRA can help you to come out on top of your retirement goals.
Money Management Mistake #5:
Not Factoring in Healthcare Costs When Planning for Retirement
The big ticket here is to remember how important healthcare costs are, when determining your retirement needs.
Retirement Support Network
PNC’s Perspectives on Retirement survey (August 2015) shows that among those with a very effective retirement support network (think spouse or partner, access to financial institutions, financial advisor, employer website, news media), 36 percent are very confident that they know how much money they need to have earmarked for retirement. Just 8 percent of those without a strong support network can say the same.
Support network or not, figuring out what you’ll need in retirement can prove challenging. Digging even deeper: Do you know what portion of your retirement assets will be allocated to the cost of healthcare?
Contrary to what many assume, Medicare may not have you covered. From age 65 on, the average couple typically spends about $288,000 on healthcare over the remainder of their lives, according to a widely quoted study, assuming one spouse lives to age 82 and the other to age 85. That’s above and beyond what Medicare pays. The Employee Benefit Research Institute puts Medicare coverage at about 62 percent of healthcare costs, with out-of-pocket spending and private insurance making up the difference. 
Medicare is Not Free
First of all, Medicare is not free. There’s no charge for Part A, which covers hospital care, but Part B (for doctors’ services) costs most beneficiaries $104.90 a month. High-income retirees pay a surcharge that can drive the monthly premium to $335.70 a month. Not counting annual increases in premiums, Medicare B costs over a couple’s projected lifetimes could total $47,000-153,000.
Many seniors also buy a Medicare supplementary, or “medigap,” policy to cover some of the bills that Medicare doesn’t pay. According to planprescriber.com, the premium for the most popular plan, Plan F, ranges from $134 to $277 a month in the Pittsburgh area, as an example. Assuming a couple pays roughly $150 a month, that’s another $68,000 in insurance premiums over their presumed lifetimes. Prescription drug policies will add more to the total. Nursing home care or in-home care will bring additional considerations (and sweeping expenses), as well.
Important Legal Disclosures and Information
PNC Perspectives on Retirement Survey, August 2015. The survey referenced was designed by Artemis Strategy Group (www.artemissg.com), a communications strategy research firm specializing in brand positioning and policy issues.
Amount of Savings Needed for Health Expenses for People Eligible for Medicare, Employee Benefit Research Institute: Notes, Vol. 34, No. 10, Oct. 2013.
Part B Costs, Medicare.gov
This material is meant to educate and not to provide legal, tax, accounting or investment advice. PNC Investments and its affiliates and vendors do not provide legal, tax or accounting advice.
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