Money Management Mistake #1 -
Not Really Diversifying Your Portfolio
In a well-diversified portfolio, each investment is meant to serve a specific purpose — complementing one another and performing under differing market conditions.
Multiple Investment Accounts
If you've ever changed jobs or opened multiple investment accounts, you may be less diversified than you think — you could be holding the same types of investments in different accounts. Plus, having accounts at different companies or financial institutions can be difficult to manage — and no one really sees the full picture.
If you can consolidate assets, liabilities and other components of your financial life into one central location, it can be easier to organize and track. Taking a more holistic approach can also help confirm your overall portfolio is prepared for all types of market activity.
Diversification & Interest Rates
Changes in interest rates can affect the value of stocks and bonds in your portfolio. To help minimize any negative impact on bonds, it can help to incorporate bonds with short, intermediate and long-term maturities into your portfolio. 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. So it's best to hold a wide range of investment types and think beyond diversifying strictly by asset class.
Money Management Mistake #2 -
Overreacting to Short-Term Market Fluctuations
Many events can lead to volatile markets: economic data, world events, natural disasters, corporate announcements and more. Anyone investing toward a long-term goal is nearly guaranteed to experience a down market at some point.
Preparing and Reacting
Your mindset is key. When investing for a longer-term goal such as retirement, it's generally easier to weather volatility and NOT react when you're further from retiring — simply because you have more time to recover from potential losses. Closer to retirement, volatility can cause tremendous stress.
Thoughtful planning can help prevent the need to draw on principal earlier than you might like and keep you from feeling like you should take on more risk in an effort to recover from losses.
When Volatility Strikes
Don't panic, regardless of your time horizon. One of the best ways to achieve goals is to carefully create a strategy and not sway from it, even when conditions are not ideal. Sticking to your plan will help you ride out downswings, preserve your assets and capitalize on upswings. Working with a financial advisor can help you build confidence and stay the course.
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 it fits with other income sources.
Choosing When to Begin Taking Social Security Benefits
As you near retirement, Social Security provides statements detailing your expected monthly benefit, depending upon when you start collecting. The later you begin, the larger your monthly checks will be. The amount differs if you start collecting at:
- Age 66, or full retirement age (FRA) if you were born between 1943 and 1954.
- Age 62, the earliest you can claim. This will be about 25 percent lower than the FRA amount.
- Age 70, the latest you can claim. This will be about 32 percent higher than the FRA amount and about 76 percent more than what you'd see each month starting at age 62.
Of course, how long you will live is the great unknown. If you think you’ll live a long time, receiving bigger benefits each month may make up for the years you waited to collect, and may reduce your need to draw on other assets.
Special Considerations for Married Couples
Married couples have an incentive for the higher earner to wait to claim benefits. When one spouse dies, the survivor’s Social Security benefit will be based on the higher earner's income. If the higher earning spouse waits until age 70 to claim benefits and dies first, the surviving spouse will receive that higher benefit for their remaining lifetime.
Make the most of your retirement assets with a well-constructed plan that carefully considers all your funding sources to create a steady, tax-efficient income stream.
Money Management Mistake #4 -
Not Contributing Enough Toward Retirement
Whether retirement is a long way off or fast approaching, it's likely to come with a hefty price tag – perhaps 70 or 80 percent of your current annual income. Make sure you’re contributing to an employer-sponsored plan such as a 401(k) plan, if available, and then see how to further ramp up your assets.
It’s generally a good idea 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 free money on the table.
401(k) Plan + IRA
Even if you’re diligent about contributing to a 401(k) plan, don’t overlook adding an Individual Retirement Account (IRA). Together, these provide a way to invest more while benefiting from tax deferred or tax-free growth (in a Roth IRA).
If you’re age 50 or older you can make additional contributions to employer-sponsored 401(k) plans and IRAs.
Contributions and tax deductibility are subject to certain age and income limits, your tax filing status and whether you (or your spouse, if applicable) are covered by an employer-sponsored retirement plan.
Money Management Mistake #5 -
Not Factoring in Healthcare Costs
Contrary to what many assume, Medicare may not have your retirement healthcare covered. Research suggests that from age 65 on, the average couple can expect to spend about $285,000 on healthcare needs above and beyond what Medicare pays.
Remember, Medicare Is Not Free
While there’s usually no charge for Medicare Part A hospital care, Part B coverage for doctors’ services currently costs most members $135.50 a month, although some pay more. Even without annual increases, this could cost more than $60,000 over the projected lifetime for a couple, and you still have deductibles and copayments to factor in.
Many seniors also buy Medicare supplement policies to cover bills that Medicare doesn’t pay, as well as drug plans. These can add another $150 to $300 a month, depending on where you live. Finally, nursing home or in-home care may bring additional expenses.
As you look to the future, healthcare costs must be planned for just as other essentials, and they're likely to take a larger piece of your budget as you age. You may also want to consider long-term care.
Contact Us Today
For help navigating financial pitfalls and staying on track towards achieving your investment goals at every life stage, contact a PNC Investments Financial Advisor at 855-PNC-INVEST or stop by a local branch.