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Four investment mistakes that can send you back to work

Many are starting this new year with a new chapter: retirement. If you’ve been a disciplined saver and taken advantage of tax-deferred plans, you’ve done a lot to get ready for this new, exciting life stage. And if you’ve been managing your accounts on your own and investing in low-cost funds over the last decade, you could be feeling especially good about the road ahead.

However, even the most dedicated investors make some common mistakes that could set their retirement plans back.

Failing to diversify

Establishing a well-diversified portfolio with an appropriate mix of stocks, bonds and other asset classes is key to meeting your investment goals. But asset allocation is not a one-time exercise: It takes work to stay on top of your portfolio to ensure it’s serving you as intended.

In the short-to-intermediate term, market dynamics will change your asset composition as some asset classes outperform others. For example, a long run-up in the stock market can result in an allocation to equities that goes well beyond your original target. While it’s tempting to stay with your winners, your portfolio can be exposed to undue risk.

Rebalancing to restore your investment mix to your original target allocation is an important step toward achieving your goals. It requires you to sell investments from the asset class that has performed well and buy investments in the asset classes that have been out of favor but now have upside potential. Unfortunately, many investors fail to rebalance regularly, and that can lead to disappointing outcomes.

Over the long term, an investor’s target asset allocation isn’t set in stone. It changes with the passage of time and as individual circumstances evolve. Younger investors typically have a large portion of their assets in aggressive equity investments, including small- and micro-cap stocks and frontier market equities. They believe that they have plenty of time to recoup losses and want to tap into the opportunity for higher long-term returns. Older investors, on the other hand, often structure their portfolios to manage risk and reduce volatility during market ups and downs, which frequently means a greater allocation to high-quality fixed income. In practice, however, establishing a target allocation is a nuanced exercise.

Americans today can look forward to long retirements. As they approach their retirement plan, they need to consider the length of time their money needs to work for them. Pursuing ultra-conservative investment strategies that don’t include an allocation to equity for growth purposes could result in portfolios that fail to keep up with spending needs and inflation.

Too many investment accounts in too many places

According to the US Bureau of Labor statistics, baby boomers hold approximately 12 jobs in their lifetimes. As a result, they may have 401(k) accounts scattered across several employers.

It’s hard to manage your investments as a unified whole if you have assets in several places. You could be overexposed to certain investments or asset classes, which may be hard to see across multiple portfolios. You could also be missing significant opportunities to minimize your tax bill.

Consolidating your retirement balances into fewer accounts also has advantages from an estate planning perspective. Each account identifies the beneficiaries that inherit the money after you pass away. Having fewer accounts to watch over makes it more likely that you’ll keep the designations current and be able to coordinate your wishes and legacy with other parts of your estate plan.

Not working with an investment coach

When you make important life decisions, it’s only natural that you turn to an expert for advice — going it alone has too much risk. You know your retirement is too important to take a DIY approach. Yet you also want to avoid getting input from too many sources, which can lead to recommendations that are confusing and contradictory.

Consolidating your retirement investments with a single provider can offer advantages over using multiple financial service companies. But even if you choose to keep some of your investments with other advisors or institutions, you can gain significant benefits when you work with a coach. That trusted advisor can take all of your holdings into consideration to give you advice on your entire portfolio, ensuring the decisions made are in your best interests.

Not considering inflation, rising health care expenses, and increased lifestyle spending

An age-old rule of thumb is that retirees spend about 70% of their pre-retirement income. It’s true that you’ll no longer be spending on things like a business wardrobe, commuting and meals. You may even have paid off your mortgage. But that doesn’t mean there won’t be pressures on your household budget when you’re retired.

Consider inflation. An annual inflation rate of 2% seems negligible, especially for those of us who remember double-digit rates in the late ‘70s and early ‘80s. Still, even a 2% inflation rate can have a dramatic effect on your spending.

For retirees, the stress on household budgets may be even greater as a result of health care spending. According to projections by the Centers for Medicare and Medicare Services, national health care spending is expected to grow at an average rate of 5.5% per year for 2018–27, well in excess of the expected inflation rate for non-health care spending.

Other expenses may also rise as a result of lifestyle changes. You’ll have more time to travel and take those vacations you’ve been putting off. Leisure activities, hobbies, entertainment, gifts to support family members, home renovations and charitable contributions can also take big bites out of your budget.

Planning for your retirement expenses is essential: If you don’t have a realistic understanding of your spending needs, you could be in for a shock down the road.

Steve Storey is the KeyBank Idaho market president and Key Private Bank sales leader. He can be reached at (208) 364-8511 or steven_storey@keybank.com.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice. KeyBank is Member FDIC. KeyCorp. © 2020. CFMA 200109- 720075

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