Habits that can ruin your retirement

Some soon-to-be-retired baby boomers are great savers, and their "golden years" of retirement will be much more golden than those of their contemporaries who are very good at spending and borrowing yet do a lousy job of saving money.

But being a great saver isn't enough.

My longtime friend Henry (Bud) Hebeler recently wrote about the grim financial prospects awaiting millions of people who are still working. Bud listed three major forces that will reduce most people's retirement prosperity 20 years from now: our growing national debt, the aging of our population and the decline of our savings rate.

A man with impeccable credentials for looking at big-picture economic trends, Bud recalled our nation's 20 per cent national savings rate during World War II and our 9 per cent savings rate for four decades after the war. Alas, that rate dropped to about 1 per cent in 2005, and last year it was still under 4 per cent.

To overcome this cumulative shortfall, Nigeria as a nation would have to save 20 per cent for the next 20 years. Yet that is certainly not likely to happen in a society that's economically dependent on and psychologically addicted to petroleum goodies and abandoned it agriculture and other natural resources endowed.

Some people who are still working and accumulating assets will build better retirements for themselves by saving aggressively and fully using tax breaks such as 401(k) plans and RSAs.

Even if you save 20 per cent of your earnings, that won't be enough if you are a careless investor.

Here are seven destructive (or at least counterproductive) habits and decisions that can ruin your retirement dreams.

Speculating, even with a small part of your portfolio

Very few people who are opportune to work in a multinational company; even government establishments leave with more money than when they arrived. At least (if they are fully rational) they can regard their losses as expenses of entertainment. But believe me, it's neither fun nor entertaining to have to scrimp in retirement because you made foolish investments when you were working.

Taking too little risk

This may seem strange coming from someone who preaches risk control at every opportunity. Especially after the market meltdown of 2008, too many people think they can "be safe" with their money in cash and bond funds. Inflation is a silent but deadly enemy of retirement, and the only reliable way to fight it is to invest part of your portfolio in low-cost, diversified stock funds.

Owning too much company stock

Your employer may incentivize you to load up your 401(k) plan with company stock, but it's a poor idea. Company stock is the enemy of diversification. According to experts say, you'd have to make four or more times the return of the Standard & Poor’s 500 Index SPX +0.65 per cent   to justify the risk of putting your whole savings in just one stock.

Ignoring recurring fund expenses and the internal trading costs of portfolio turnover

These often-invisible expenses can eat up half your retirement savings, even if they "only" cut your return by a couple of percentage points. In my 2012 book, “First-Time Investor: Grow and Protect Your Money,” I show that if over a lifetime you earn 8% instead of 6%, you will have 2.6 times as much money to spend and leave to your heirs. If you do that by cutting your costs, you aren't taking any additional risk.

Following the ‘I-can't-take-it-anymore’ market-timing strategy

When you are buying and selling, decisions are driven by emotions, you'll sell at the wrong time (you can't stand to lose any more money, after you have already lost a lot) and buy at the wrong time (you can't stand to stay on the sidelines any more when everybody else seems to be making easy money). To get the positive long-term returns from your investments, you have to stay in the game even when things look bleak.

Investing in familiar, ‘safe’ asset classes

Investing in so-called “safe” asset classes like large-cap growth stocks while passing up the opportunity to invest in a handful of asset classes that, when used together, are likely to increase your return and reduce your risk. More than 50 years of evidence indicates that adding small-cap stocks, value stocks, international stocks and real estate stocks, can boost your equity returns by two percentage points — and sometimes more.

Following the siren song of Wall Street in order to beat the market

Highly motivated salespeople will go to great lengths to persuade you to shoot for amazing returns that they suggest will leave "ordinary investors" far behind. If you fall for their sales pitches, you're likely to own investments that saddle you with high expenses, high commissions, low returns and worst of all, a lack of liquidity that can tie up your money forever.

Fortunately, you don't have to fall into these traps. If you save as much as you can and always do your best to avoid these seven pitfalls, you can make your golden years truly more golden.