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The G.R.A.N.D.P.A. Rules for Redemption

The second of a two-part blog series. Read Part I here.

What can you do to avoid falling victim to the temptations of the The 7 Financial Sins in Retirement? Follow the G.R.A.N.D.P.A. Rules to atone for them.

Get a plan.

A plan is essential for a successful retirement. Mapping out everything from where to live to everyday spending helps determine how much is needed to fund a full, happy retirement. Early planning also helps answer the question of when it’s even possible to retire. Because of the benefits of retirement planning, you should seek assistance from a professional investment adviser or planner. When hiring an adviser pay close attention to his or her fiduciary status and costs. A fiduciary is legally obligated to act in your best interests. Additionally, a low-cost, fee-only adviser can keep more of your money invested.

Reduce risk.

You can sidestep the pitfalls of greed and better protect your money in two ways. First, reduce risk in your investment portfolio by diversifying across several asset classes. That way you increase your exposure to the potential returns of different asset classes and reduce your exposure to the potential losses of a few asset classes. Second, ignore high-cost, actively managed investments that attempt to beat the market since the majority of these supposed “market experts” underperform their benchmarks, according to the S&P Dow Jones Indices mid-year 2014 SPIVA U.S. Scorecard.  

Allocate to stocks.

There is risk in avoiding stocks. In order to preserve your buying power, it’s necessary to hold investments with expected returns greater than inflation. Consider that from 1900 to 2012, U.S. bonds generated 2.0% returns after inflation while U.S. stocks generated 6.3%, according to Credit Suisse. A portfolio of only bonds may not last. Instead, a balanced allocation of stocks and bonds can boost portfolio returns and increase its sustainability without substantial risk. However, you should own mutual funds and exchange-traded funds, which provide greater diversification and are less likely to suffer a permanent loss than individual stocks. 

Never charge it.

The purpose of saving money during years of work is to have the necessary funds for expected retirement expenses. Therefore, everything in retirement should be paid in cash, never with credit. If your retirement income is unable to cover most needs, you may have to consider delaying retirement, lifestyle changes or supplementing income through part-time work.

Determine a withdrawal rate.

In order to know how much to spend without running out of money, you should establish an appropriate withdrawal rate. A common withdrawal strategy is the “4% rule.” Generally, your portfolio should last throughout retirement while withdrawing around 4% every year. However, some retirement researchers such as Wade Pfau, Professor of Retirement Income at The American College, believe the 4% rule is unreliable because so much is dependent on an individual investor’s situation and various economic and market conditions. Therefore, you might consider a flexible withdrawal rate, as your financial situation can change.

Prepare for the unexpected.

While employed or retired, the unexpected happens, so prepare for the future by maintaining financial flexibility. You should retain an emergency fund in cash, CDs or money market accounts to cover 6-12 months of expenses. Additionally, don’t tie up your invested money in illiquid assets such as alternative investments or annuities, which have withdrawal restrictions. Stick with traditional investments like mutual funds that you can easily withdraw from as needed.

Ask questions.

Finally, to avoid scams and fraud, it’s imperative to exercise skepticism of investments that seem too good to be true. The best way to judge an investment’s legitimacy or risks is to be diligent in researching the seller as well as seek advice from trusted individuals, such as a family member or qualified investment adviser. Remember, Bernie Madoff stole billions from several people, including many in retirement, who once thought he was a stand-up guy.

How do you plan on avoiding financial mistakes in retirement? Share this blog with your tips.

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