This morning I had the chance to chat with my friend John Hauserman of RetirementQuest.com. I’m a little ways down the road from retirement, but that’s the perfect time to start thinking about it—when it’s not an urgent, pressing need. By then it’s too late.
I asked John a couple of questions that have been on my mind.
John, I’m not a risk-taker, and I love it when people can give me a heads-up so I don’t make a huge mistake. What do you consider the single biggest mistake people make when it comes to planning for retirement?
The single worst, and indeed pervasive mistake I see in people make their retirement investing efforts is the tendency to use short-term criteria to make long-term decisions. Let me elaborate: far too many investors jump from one investment strategy to another based largely upon their emotions of the moment. Those emotions are largely driven by what they hear on the news or what they hear from the financial industry, both of which are generally trying to sell them something.
For instance, many people continue to tell me that they pulled their 401k out of the stock market when “things got real bad” (2008-spring of 2009) and/or stopped contributing “until things settled down.” Now, for short-term money, like that which might be needed to pay the college tuition in September that is reasonable thinking. In fact, that money should never have been in volatile assets like stocks (or stock-based mutual funds) to begin with.
The problem with the 401k, however, is that it is a long-term planning instrument and the above referenced short-term decision-making caused a number of very costly but predictable outcomes:
A. The market declined so rapidly that most investors did not react quickly enough and so by the time they pulled their money out had already suffered the lions’ share of the losses.
B. The vast majority of those same investors were asleep at the switch again when the market staged an unexpected (by most) rally recovering most of its losses in a very short period of time. As a result, many, many people suffered most of the loss but missed out on most of the restorative recovery.
So, jumping the financial gun, so to speak, is a bad idea … and it sounds like talking things over with someone in the know before making such big decisions would be a good idea. I admit, I’m learning as I go, and I appreciate your input.
John will join me again tomorrow as we continue to discuss retirement and 401k savings plans.
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