3 Investment Mistakes to Avoid as You Approach Retirement
The investment expert, American billionaire, businessman, former real estate attorney and Warren Buffett’s closest business partner and right-hand man, Charlie Munger, says the best way to become successful when investing is to avoid mistakes. Now, that’s not very helpful if you don’t know the key mistakes to avoid!
Investing can be challenging, and when you approach retirement, there are particular issues to consider in ensuring you don’t run out of money.
This blog will cover 3 investment mistakes to avoid as you approach retirement.
Forgetting about inflation
Forgetting about inflation is a mistake that needs to be avoided. According to Office for National Statistics, “the Consumer Prices Index rose by 9.0% in the 12 months to April 2022, up from 7.0% in March,” resulting in the cost of living being the highest in 40 years since 1982. And the Bank of England forecasts inflation to hit 10% this year. This means the value of your money is decreasing.
Therefore, failing to consider inflation when planning for retirement could result in losing most of your retirement funds due to spending more on goods and services than usual. If you have retirement income that does not at least grow in line with inflation, you may not be able to live the same lifestyle you are living now or the lifestyle you dreamt of living.
Investing is the answer to beating inflation. If you leave your money in cash savings, your nest egg will rapidly be eaten away, especially considering how long your retirement is likely to be. Picking the suitable investments with the right level of risk for you and a sensible mix between different types of underlying assets is critical.
Forgetting about risk and volatility
You have to think about how long your money will be invested. If for ten years, you can genuinely afford to take more risk as you have the time to bear the ups and downs of the stock markets.
However, in retirement, you usually need to take money out of your pension to live off and cannot afford to invest heavily.
A mix of investments and funds can be a great solution. A potential solution is to keep any money you need for the next 5 years in a low-risk account whilst keeping the majority of your retirement fund invested somewhere you can still achieve real growth over the next 20-30 years.
Not considering tax relief and overall position
How much you should put into your pensions as you approach retirement and when and how you take money out of your pensions depend a lot on your tax position.
As pensions receive tax relief, it can often be worth maximising how much you put in whilst you’re still working. This is especially true if you are a higher-rate taxpayer. Pension savings are then taxed as income when you withdraw them, with the benefit of 25% of the pot being tax-free. So, how much you take out in each tax year should be considered carefully to ensure you are minimising your tax liability.
Maximising tax relief is overlooked by many simply because of the lack of knowledge people have about it. As a trained financial adviser, my responsibility is to ensure you receive the maximum in retirement by considering tax relief, investment returns and your individual needs.