Presented by Andrew D. Burish, Managing Director at The Burish Group of UBS Financial Services Inc.
To err is human, but you can sidestep some of the most common mistakes people make in saving for retirement by avoiding these four oh-so-tempting behaviors.
Retirement savings mistake #1: procrastinating
Even though you know you will get older and eventually retire, a little part of you still believes you might not. Nobel Prize-winning economist Richard Thaler, the founding father of behavioral economics, has spent much of his career exploring why so many Americans have difficulty saving for retirement. One thing he found is that people would rather enjoy what their money can do for them today rather than in the future.1
Retirement savings mistake #2: being too loss averse
We don’t like to lose money, so the notion of less money in our paycheck today to serve our needs in the future is a tough pill to swallow. The problem with loss aversion is that we keep delaying that uncomfortable feeling of a smaller paycheck. If you delay too much, you lose out on the compounding effect. For example, if you decide to save $5,000 a year beginning at the age of 35, by the time you’re 65—assuming a 4.5% rate of return—you’ll have 43% less savings than if you had started saving at age 25. That adds up to $240,000.1
Retirement savings mistake #3: not practicing discipline
When deciding how to invest, too often investors try to time the market rather than follow a disciplined investment approach. Trying to get in the market “at the right time” sounds smart, but in reality, it often leads to inaction, because that right moment never seems to come. The idea of timing the market only reinforces the first two mistakes (procrastination and being too loss averse). Here’s an example of a disciplined savings strategy: You could start by putting $5,000 away, and then add 5% each year. It might sound boring, but in the end, it will add up to much more than a “timed” strategy that never quite launches.
Retirement savings mistake #4: tinkering with your portfolio too much
You want to take a more active role in your investments? That’s good, except if you have a tendency to over-manage. This often happens with retirees, who find themselves with more free time than ever before, and take a keen interest in chasing performance. In the research paper, “Trading is hazardous to your wealth,” authors Brad Barber and Terrance Odean found that, on average, households turned over 75% of their equity portfolios annually and underperformed by 1.5% each year.2 The biggest cause of this is mistiming when to buy and sell a particular fund. People are often driven by the desire to own more of that “hot” stock in rising markets when others are buying, or by “fear” in falling markets when others are selling. In a diversified portfolio, you’ll always be tempted to adjust the portfolio exposure in favor of the best-performing asset classes. The problem is, acting on that temptation may be costing you.
So what’s the trick to saving for retirement? Actually, there is none. Start saving for retirement today, and stick with it. No gimmicks, no magic timing and no schemes that will “pay off big.” Just old-fashioned discipline.
1Modern Retirement Monthly, “Three common mistakes in retirement planning,” November 7, 2017 [Note: Do we have the article title and date to add in here?] 2The Journal of Finance, ”Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors,” April 2000. This article has been written and provided by UBS Financial Services Inc. for use by its Financial Advisors. As a firm providing wealth management services to clients, UBS is registered with the U.S. Securities and Exchange Commission (SEC) as an investment adviser and a broker-dealer, offering both investment advisory and brokerage services. Advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. It is important that clients carefully read the agreements and disclosures we provide about the products or services offered. For more information, please visit our website at ubs.com/workingwithus. In providing financial planning services, we may act as a broker-dealer or investment adviser, depending on whether we charge a fee for the service. Financial plans provided free of charge are a service incidental to our brokerage relationship and the service terminates upon delivery of the plan. We provide financial planning services as an investment adviser for a separate fee pursuant to a written agreement, which details the terms, conditions, fee and scope of the engagement. Note that financial planning does not alter or modify in any way the nature of a client’s UBS accounts, their rights and our obligations relating to these accounts or the terms and conditions of any UBS account agreement in effect during or after the financial planning service. Clients are not required to establish accounts, purchase products or otherwise transact business with us to implement their financial plan. Should a client decide to implement their financial plan with us, we will act as either a broker-dealer or an investment adviser, depending on the service selected. For more information about our financial planning services for a fee, please see the firm’s Financial Planning Disclosure Brochure. UBS Financial Services Inc., its affiliates and its employees do not provide tax or legal advice. Clients should speak with their independent legal or tax advisor regarding their particular circumstances. Investing involves risks, including the potential of losing money or the decline in value of the investment. Performance is not guaranteed. © UBS 2019. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. UBS Financial Services Inc. is a subsidiary of UBS AG. Member FINRA/SIPC.
