For past generations, retirement planning was something of an after-thought, if considered at all. It was simply a case of paying off the family home, tucking away a few shares, bonds and some cash and relying on the safety net provided by the age pension to get by. But in the twenty-first century, this is no longer enough. In fact, industry studies suggest many couples plan to live on more money ($30,000 pa) than the Age Pension currently provides (around $19,000 annually).
So, the implication is, if individuals want to live well in retirement, the onus is on them more than ever to start saving as early as possible, establish their retirement goals, to evaluate the myriad of investment options and be aware of the risks involved. At the same time, with this greater investment complexity, it’s also possible for investors to get confused and make mistakes that can affect retirement savings. In this article, I will look at some of the more common investment mistakes, the signposts to look out for and strategies for turning mistakes into winners. Let’s start by looking at probably the most common mistake, “Failing to Plan”.
1. Failing to plan for your financial future
“Fail to plan, plan to fail” is just so true when it comes to investing today. In fact, the recent ANZ Survey of Adult Financial Literacy in Australia, said only about 37 per cent of adult Australians had worked out how much they needed to save for retirement. Look, the money just won’t appear in your bank account the day you retire and this is where a financial plan is so important. It is q bit like a road map that indicates where you want to go (a comfortable retirement) and the best way to get there. The plan should contain investment advice and information about the level of risk attached to your investments. A good plan will also address issues like what insurance you should consider, your taxation position, cash flow (budget) as well as any retirement and estate-planning issues.
2. Not having a budget
Put simply, budgeting is the most effective tool there is to get and keep your finances under control. A budget tells you where you money is going, where you can cut back and where you can save. Look, I know there’s no denying cutting back on your spending is difficult when there is so little fat to trim in the first place. But no matter how much you earn, it is a question of taking co troll of your money. And this means managing your cash flow, which can only be achieved through budgeting.
A budget will also give you a much better idea of where you money is actually going. It is estimated that people regularly spend between $50 and $300 each month that they can’t account for. Yet this money could be used to pay off debts like a credit card or mortgage or be added to your retirement savings.
3. Leave your money in the bank
Sure, the bank is a terrific place for your everyday spending money but it’s no good for your investment money. If you really want to stick with the bank, don’t leave money in it, buy shares in it. Shares (and property for that matter) present more risk than cash and in the early days may actually generate little or even negative returns. On the other hand, shares and property generate capital growth over the longer term and returns may be taxed favourably.