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5 Investment Assumptions That Will Cost You in Retirement

David Ning

There's no way to predict how your investments will perform or what your expenses will be in retirement. We compensate by making assumptions to fill in the knowledge gaps. But if your estimates are incorrect, it could have dire consequences for your retirement finances. Here are a few common assumptions you should avoid using when preparing for retirement.

A bad day retired is better than a good day working. Retirement can certainly be a dream come true, but not everyone enjoys retirement. Some people get so used to their identity on the job that they don't know how to live a life outside of it. Other people don't know how to make friends or socialize outside the working world. Retirement can be a lovely experience, but you need to proactively map out a lifestyle you know you will enjoy. Don't wait until you are out of work to figure out how you will fill your newfound free time.

Investing is mainly for the accumulation phase. We talk so much about retirement being the goal that many people assume the work of saving and investing is done once we sign off the work computer for the very last time. Yet, many people are going to need that portfolio to last for another three decades after retirement. You will certainly need to keep making astute investment decisions throughout your retirement, or else your portfolio, and possibly your lifestyle, will suffer. Your investment plan needs to include your entire life cycle, not just the years leading up to retirement.

I'll be a do-it-yourself investor for the rest of my life. Some people enjoy the challenge of picking smart investments and watching them increase in value. But it may not be realistic to manage your own portfolio throughout retirement, especially during the later years when you could experience physical or mental declines. Even if you hate the idea of paying someone to manage your portfolio when you could do it better yourself, at least make plans to seamlessly pass the overseeing of your money to a third party when you start to lose the ability or inclination to make investment decisions.

Retirement is set as long as I have 25 times projected expenses saved. Withdrawing 4 percent of your portfolio adjusted for inflation each year is likely to help your money last the rest of your life. But that doesn't mean you can safely ignore your portfolio once you have accumulated 25 times your projected yearly spending. After all, you certainly can't guess what your expenses will be three decades in the future or what unexpected costs could throw your projections off track. The only real strategy is to be flexible. For example, withdrawing less from your portfolio in years when investment performance suffers will increase your odds of never running out of money.

Nothing should get in the way of accumulating a large nest egg. Money is important, but it cannot buy everything. Friends, family and causes you care about are just some of the areas that are worth every penny you put in. I'd venture to say that having a healthy relationship with those around us is worth even working more years. Don't become a scrooge who ends up dying alone and helping no one just to save more for retirement.

A comfortable retirement is well within reach, but it's imperative you don't make any incorrect assumptions that could jeopardize your success. Instead of trying to learn a bit about every strategy that's out there, concentrate on one strategy you can maintain over the long term. Selecting a single investment strategy you can stick to will minimize your chances of making investment errors and help you avoid making assumptions that could end up costing years of savings.

David Ning is the founder of MoneyNing.com .



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