Retirement expert reveals the two biggest mistakes people make
Retirement planning is done over several decades, but even over time, people are still making avoidable mistakes, an expert said.
Larry Swedroe, chief research officer at Buckingham Wealth Partners, joined Yahoo Finance Live and shared the top mistakes people make when planning retirement. And the two biggest offenders, he explained, overestimate the returns and ignore the risk.
Read more: How to get your retirement savings going again
"We believe this is a real problem for people as they overestimate the expected returns they are likely to get," said Swedroe, author of "Your Complete Guide to a Successful and Safe Retirement".
Reliance too heavily on historical evidence will pinch people because market returns have fluctuated over the years and there are no guarantees. An overestimation or misjudgment means the difference between a financially comfortable retirement and a mess in your golden years.
An overestimation or misjudgment means the difference between a financially comfortable retirement and a mess in your golden years. (Photo: Getty)
Over the past 38 years, stocks have returned 10% and bonds 6%, making a diversified portfolio around 8.5% a year - over 10% in a few years, Swedroe said.
"Well, you just can't get there today," he said. "The share price-to-earnings ratio is roughly twice what it used to be."
Since timing is everything, but no one has the benefit of knowing the future, the second common mistake is ignoring "sequential risk," or the risk of withdrawing retirement accounts in a downward market when the value of yours Investment has taken a hit. he said.
Read more: Expert: Retired investors should view uncertainty as their new normal
Plan with the expectation that economic downturns will occur. However, if your retirement clashes with a 2008 or 2000-2002 type event when markets collapse and "only collapse for the first year or two," Swedroe said you can't plan for annual withdrawals of 4 % or 5% per year.
"That could explode in your face," he said, "because the losses happen and you get out of a portfolio and can't recover."
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Stephanie is a reporter for Yahoo Money and Cashay, a new personal finance website. Follow her on Twitter @SJAsymkos.
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