by Kathryn Tuggle, Yahoo
For many baby boomers retirement is just around the corner, but they may also be headed for some big mistakes when it comes to investing for the long haul.
Managing your money is never easy, but when you're ready to quit the workforce, a mistake can turn your golden years to brass.
We checked in with financial planning experts to find the five mistakes baby boomers fall victim of when planning for retirement and how to avoid them.
DON'T: Think that owning different mutual funds means you're "diversified"
"Some people think that because they own mutual funds through different money managers, they are diversified, but really they are only in one corner of the market," says Ken Kamen, president of Mercadien Asset Management.
Kamen calls this phenomenon as "phantom diversification," where an investor really just has a duplicate set of the same stocks, that doesn't include small-cap stocks or international exposure. He urges people to get out of one corner of the market.
"Many people buy mutual funds from Vanguard, something from Fidelity, but they don't realize the top 30 holdings for all these companies are almost all identical," says Kamen. " With almost all the popular funds, the top 20 or 30 holdings are exactly the same. They just own the same thing in five different places."
"Check under the hood," advises Kamen. Even if you believe you bought different mutual funds, look to make sure they aren't all invested identically.
DON'T: Be afraid of looking "across the pond" for investments
"It always amazes me that people are comfortable buying consumer products from all over the globe, but have an innate fear of investing globally," says Kamen. "If you're buying things made in China and Singapore, why not spend a few of your dollars there with growth potential?"
Kamen says that 20 years ago, stocks in the U.S. offered the best potential for growth, but that's not the case today. He listed China, India, and Brazil as countries that offer strong growth opportunities.
"It only makes sense. The part of your portfolio you want to have growth needs to be invested in an area of the world where there is growth," says Kamen. "Look for countries that have posted significantly greater growth rates in the last five years."
DON'T: Jump on the bandwagon of what's popular
"Don't just narrow your portfolio down to what's making money at the moment," says Rick Salmeron, an investment adviser in Dallas. "When the investment universe shrinks down and everyone is talking about one thing, it pretty much assures you'll be the last person to enter that idea before the lights go out."
Salmeron pointed to the 1999 tech bubble and the recent real estate bubble as reasons why getting into the most popular investments of the day can be dangerous.
While it's good to look for investments that have promise or growth potential, it should be a warning sign if absolutely everyone is talking about an investment.
"If it's the hot topic of the moment, that's the point in time where your alarm bells should be ringing," warns Salmeron. "You've got to step back and conclude, you know what, it's the worst time to get into this area because of its heightened interest."
DON'T: Chase returns instead of planning for income
When it comes to investing pre-retirement, the biggest concern by far is longevity risk, says Curt Knotick, a financial planner with Accurate Solutions Group in Butler, Penn. The worst thing that can happen to a retiree is that they outlive their funds because they didn't plan accordingly, he adds.
"When you're younger, you are investing for retirement by using your paycheck as contributions to your 401(k) and IRA, and you have room to recover if something happens," says Knotick. "When you are retired, you won't have the ability to be as bold as you once were, because the money you were investing, you now need to pay the bills."
The danger is that a boomer will pull out his or her shares during a bear market to use for income, and once those shares are cashed out, they aren't there to grow during the good times, Knotick says. He advises investors leave themselves enough cash on hand so that they don't have to withdraw money from stocks that they will need to mature down the line. While being an aggressive investor is great when you're still in the work force, it can backfire once you're living on a fixed income.
"Really, we're looking at the difference between investing for retirement vs. investing for accumulation," says Knotick. "You've got to position your income in the basement of the house, the most secure place, so it can weather the storm."
He listed annuities, bonds, and more conservative investments that have some type of guarantee behind them as lower-risk places for baby boomers to put their money.
DON'T: Confuse your CPA with a tax planner
One way to ensure you've got more money coming in during retirement is by making sure it's taxed less, says Knotick. Often times, baby boomers will have a certified public accountant working for them, but CPAs do not specialize in tax planning.
"A tax expert can help reduce a person's tax liability from 15% down to 7% simply by restructuring their portfolios and using a few strategies they might not have thought of," says Knotick. "Taxes have nowhere to go but up, and retirees have to be positioned for tax advantaged income in future."
Baby boomers interested in checking on their current tax structure should go to a financial planner who also advertises for tax planning, Knotick says. Those planners will work in conjunction with your CPA to make sure your 1040 is structured to your advantage. Knotick says boomers may be listing things on their tax return unnecessarily that can put their Social Security benefits at risk for being taxed.
"If you can reduce that tax burden, it's just more money in your pocket," says Knotick.
For many baby boomers retirement is just around the corner, but they may also be headed for some big mistakes when it comes to investing for the long haul.
Managing your money is never easy, but when you're ready to quit the workforce, a mistake can turn your golden years to brass.
We checked in with financial planning experts to find the five mistakes baby boomers fall victim of when planning for retirement and how to avoid them.
DON'T: Think that owning different mutual funds means you're "diversified"
"Some people think that because they own mutual funds through different money managers, they are diversified, but really they are only in one corner of the market," says Ken Kamen, president of Mercadien Asset Management.
Kamen calls this phenomenon as "phantom diversification," where an investor really just has a duplicate set of the same stocks, that doesn't include small-cap stocks or international exposure. He urges people to get out of one corner of the market.
"Many people buy mutual funds from Vanguard, something from Fidelity, but they don't realize the top 30 holdings for all these companies are almost all identical," says Kamen. " With almost all the popular funds, the top 20 or 30 holdings are exactly the same. They just own the same thing in five different places."
"Check under the hood," advises Kamen. Even if you believe you bought different mutual funds, look to make sure they aren't all invested identically.
DON'T: Be afraid of looking "across the pond" for investments
"It always amazes me that people are comfortable buying consumer products from all over the globe, but have an innate fear of investing globally," says Kamen. "If you're buying things made in China and Singapore, why not spend a few of your dollars there with growth potential?"
Kamen says that 20 years ago, stocks in the U.S. offered the best potential for growth, but that's not the case today. He listed China, India, and Brazil as countries that offer strong growth opportunities.
"It only makes sense. The part of your portfolio you want to have growth needs to be invested in an area of the world where there is growth," says Kamen. "Look for countries that have posted significantly greater growth rates in the last five years."
DON'T: Jump on the bandwagon of what's popular
"Don't just narrow your portfolio down to what's making money at the moment," says Rick Salmeron, an investment adviser in Dallas. "When the investment universe shrinks down and everyone is talking about one thing, it pretty much assures you'll be the last person to enter that idea before the lights go out."
Salmeron pointed to the 1999 tech bubble and the recent real estate bubble as reasons why getting into the most popular investments of the day can be dangerous.
While it's good to look for investments that have promise or growth potential, it should be a warning sign if absolutely everyone is talking about an investment.
"If it's the hot topic of the moment, that's the point in time where your alarm bells should be ringing," warns Salmeron. "You've got to step back and conclude, you know what, it's the worst time to get into this area because of its heightened interest."
DON'T: Chase returns instead of planning for income
When it comes to investing pre-retirement, the biggest concern by far is longevity risk, says Curt Knotick, a financial planner with Accurate Solutions Group in Butler, Penn. The worst thing that can happen to a retiree is that they outlive their funds because they didn't plan accordingly, he adds.
"When you're younger, you are investing for retirement by using your paycheck as contributions to your 401(k) and IRA, and you have room to recover if something happens," says Knotick. "When you are retired, you won't have the ability to be as bold as you once were, because the money you were investing, you now need to pay the bills."
The danger is that a boomer will pull out his or her shares during a bear market to use for income, and once those shares are cashed out, they aren't there to grow during the good times, Knotick says. He advises investors leave themselves enough cash on hand so that they don't have to withdraw money from stocks that they will need to mature down the line. While being an aggressive investor is great when you're still in the work force, it can backfire once you're living on a fixed income.
"Really, we're looking at the difference between investing for retirement vs. investing for accumulation," says Knotick. "You've got to position your income in the basement of the house, the most secure place, so it can weather the storm."
He listed annuities, bonds, and more conservative investments that have some type of guarantee behind them as lower-risk places for baby boomers to put their money.
DON'T: Confuse your CPA with a tax planner
One way to ensure you've got more money coming in during retirement is by making sure it's taxed less, says Knotick. Often times, baby boomers will have a certified public accountant working for them, but CPAs do not specialize in tax planning.
"A tax expert can help reduce a person's tax liability from 15% down to 7% simply by restructuring their portfolios and using a few strategies they might not have thought of," says Knotick. "Taxes have nowhere to go but up, and retirees have to be positioned for tax advantaged income in future."
Baby boomers interested in checking on their current tax structure should go to a financial planner who also advertises for tax planning, Knotick says. Those planners will work in conjunction with your CPA to make sure your 1040 is structured to your advantage. Knotick says boomers may be listing things on their tax return unnecessarily that can put their Social Security benefits at risk for being taxed.
"If you can reduce that tax burden, it's just more money in your pocket," says Knotick.
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