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Daniel Calugar Lists 5 Investment Mistakes to Avoid

Effective investment strategies are crucial for a secure retirement. In this article, investor Daniel Calugar explores five common retirement investment mistakes and valuable tools for adopting more productive behaviors.

Taking Excessive Risk

When constructing retirement investment strategies, you are most decidedly playing the long game. It is all about taking the necessary steps when you are young(er) to set yourself up for long-term success.

Retirement age is coming and is unstoppable, but it’s not coming quickly. You want investments with similar characteristics – definitely growing, but not so quickly as to introduce unnecessary risk.

Stock trading’s higher risk profile has an important place in financial success and stability but should not be the primary tactic for retirement wealth accumulation. Retirement investing is about buying stocks for long-term gain, not short-term profit.

Poor Tax Planning

Retirement investment tools include a Roth 401(k) or Roth IRA where you pay taxes on the front end, and all withdrawals will be tax-free, or a traditional IRA or 401(k) where you pay taxes as the money is withdrawn. Each of these has potential benefits, but you will need to understand your current and expected tax burden to make the right choice.

This decision is based on estimating your tax rate when you retire compared to your tax rate as you are investing for your future retirement.

There are other considerations, such as if the need arises to take a loan from these funds. It is often helpful to have someone with a fiduciary duty, an obligation to act in your best interest, as an advisor on your team. A tax consultant or tax planner can help choose the right option.

Failing to Consider Inflation

In many ways, inflation is the great unknown in the retirement picture. The inflation rate rises and falls as a reflection of the overall economy. While the U.S. is in a long period of modest inflation, under 3% for the last several years, that can change quickly.

At a 3% inflation rate, what costs $50,000 now will cost $67,000 in ten years.

Target-date retirement funds are a simple vehicle for retirement planning. They are designed to be the only investment an investor uses to save for retirement. The concept is simple: pick a fund intended for the year you plan to retire, put as much as you can into the fund, then forget about it until you reach retirement age. But even these hands-off tools can not predict the everchanging inflation rate, so be prepared to make manual adjustments along the way.

Failing to Diversify

The point of a diversified portfolio is to provide high-earning stability across all investable assets. A typical diversified portfolio will contain stocks, fixed income, and commodities. If one investment fails to perform adequately, another will provide the needed stability.

Sometimes retirement investors mistake having multiple mutual funds as owning a diversified collection of investments. Owning shares of several similar mutual funds does not provide the stability required of a diversified portfolio. If these funds rise and fall in the same pattern, that is not diversification.

Failing to Rebalance

Over the years, between your higher earning potential at a younger age and the time when you hand the reigns over to the next generation, there will undoubtedly be ups and downs. There will be ebbs and flows of inflation as you move from one tax bracket to another.

These changes will require you to keep one eye on your retirement investments. Failing to rebalance your portfolio to reflect the realities of a changing financial landscape can cost you dearly. The longer your assets go out of balance, the more severe the damage.

Don’t overreact to short term changes in your economic picture but also don’t avoid making corrections when they will improve your long-term stance. Often the help of a financial planner is a worthwhile investment.

About Daniel Calugar

Dan Calugar is versatile and experienced investor with a background in computer science, business, and law. He developed a passion for investing while working as a pension lawyer and leveraged his technical capabilities to write computer programs that helped him identify more profitable investment strategies. When Dan is not working, he enjoys spending time working out and being with friends and family. As a pilot with over 2000 hours of single-pilot experience flying business jets, he enjoys flying volunteer flights for Angel Flight.

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