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The Biggest Financial Mistakes I See Thumbnail

The Biggest Financial Mistakes I See

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By Eric Chetwood, CFP®

Everyone makes mistakes, but when it comes to your finances and retirement planning, too many mistakes can ruin an otherwise stress-free retirement. Luckily, many common mistakes are completely avoidable with the right knowledge and the right financial partners on your side. Here are the top 5 financial mistakes I see, and what you can do to avoid them.

1. Using The Wrong Calculator To Estimate Returns

Many people use retirement calculators to estimate how much they’ll have saved for retirement by a certain age. These calculators typically factor in how much you currently have saved, your consistent savings rate, and the estimated compound interest you’ll earn on those investments. But most internet calculators aren’t reliable for calculating retirement income.

Internet calculators assume average rates of return, which can be misleading for the distribution phase of life. They also don’t factor in the sequence of returns risk, which is the risk that your portfolio experiences a market decline in the early years of retirement. The possibility of a downturn, paired with ongoing withdrawals, could result in a significant reduction of your portfolio.

To estimate your retirement income more accurately, you can run a Monte Carlo simulation (pictured below). A Monte Carlo simulation allows you to look at thousands of possible scenarios rather than two simple scenarios. It runs a regression analysis of the data from those many scenarios and projects your probability of success for reaching your retirement income goals.

2. Selling Stocks During A Market Downturn

Additionally, selling stocks during a market downturn in retirement could permanently reduce the size of your nest egg. If you need to sell $10,000 a month in retirement and then the market falls by 20%, you’ll have to sell more shares to generate that $10,000. This is known as reverse compounding and it leads to portfolio erosion.

To avoid this mistake, it’s important to keep a cash flow reserve so you never have to oversell stocks during a market downturn. A cash flow reserve protects your nest egg from market volatility and provides you with a source from which to draw cash until the market stabilizes. Historically, most market downturns recover within 24 months.

3. Not Being Diversified

A cash reserve provides an additional benefit in that it allows you to remain diversified during retirement. When you have a cash reserve in place, you can continue to position your portfolio for the long term without worrying about needing to access cash from your investments immediately.

A cash reserve gives you more opportunity to find an optimal amount of risk and diversification in your investment allocation. When your cash reserve gets depleted, you can refill it with dividends and interest during periods of economic growth.

4. Not Focusing On Dividends

Speaking of dividends, too many retirees fail to focus on dividends as part of their retirement income strategy. All diversified holdings should generate dividends for retirees because dividends provide stable, passive income. Dividends allow you to keep your portfolio at the optimal level needed to achieve your estate and legacy planning goals. Dividends also reduce the risk that you draw down your nest egg too early.

5. Making Emotional Investment Decisions

Finally, the last common mistake I see is when retirees make investment decisions based on emotions rather than historical economic data. As Nick Murray said, “Wealth-building has more to do with investor behavior than investment performance,” which we’ve found to be true. If you can keep your emotions in check, your investment outcomes will be better off.

Investors’ greatest fears are often tied to market volatility. But market volatility is a matter of  when, not if. If you recognize that market volatility is inevitable, you’ll be less likely to get spooked during market downturns. A 10% to 20% drawdown in any given year is very common, so in a $1 million portfolio, $100,000 to $200,000 may seem like it went away temporarily.

These volatile periods are completely normal and to be expected, but of course, they can still induce fear and panic. After all, a temporary decline of $100,000 to $200,000 is understandably unnerving. Nevertheless, data shows that investors who pull out of the market during periods of volatility miss out significantly on resulting gains from the inevitable upturn. 

Avoid These Mistakes With A Trusted Financial Partner

The good news is that these mistakes are entirely avoidable. With the right knowledge and the right mindset, you can increase the likelihood of having a truly stress-free retirement. But you also don’t have to make this journey alone. At Adams Chetwood Wealth Management, we are committed to helping guide our clients to financial peace of mind. 

Our team helps you retire with confidence by paying attention to all aspects of your financial picture, including retirement planning, investment management, estate planning, insurance analysis, and more. To see how we can help you, schedule a complimentary introductory meeting online, email us at audra.grice@adamschetwood.com, or give us a call at (919) 287-5660.

About Eric

Eric Chetwood is managing partner and CERTIFIED FINANCIAL PLANNER® (CFP®) at Adams Chetwood Wealth Management Group, a faith-based Registered Investment Advisory (RIA) firm located in Durham, North Carolina. Eric graduated from the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill in 2003 with a bachelor’s degree in business administration and has been on the Adams Chetwood team for over 15 years. Eric spends his days helping clients with comprehensive financial planning and portfolio construction and helping them navigate the opportunities and challenges of each stage of life. Away from the office, Eric enjoys effecting change in the local community. He was chosen to participate in the 2007 Leadership Durham program and the 2009 Leadership Triangle program. Currently, Eric serves as a directional Elder at the Summit Church. He also serves on the board of directors for the NC Study Center at UNC-CH and previously served on the board of Samaritan Health Center, an organization that provides medical care to uninsured and low-income families in Durham. He and his wife, Allison, have two sons, and are passionate about adoption advocacy as well as leveraging their gifts and resources to alleviate physical and spiritual poverty through microfinance and social businesses. To learn more about Eric, connect with him on LinkedIn.