Investing success, like academic achievement, takes some effort. You have to assess your goals, study your options and take a refresher course now and again. Review these common investing mistakes so that you're ready for the ultimate final exam: retirement!
- Not investing soon enough. If you're a new educator, the time to start planning for retirement is now. Yes, you have a defined benefit pension plan through CalSTRS or CalPERS. But your pension benefit is unlikely to be enough to support you fully in retirement. On average, your CalSTRS benefit will replace only 63% of your pre-retirement income.* The average monthly service retirement benefit for CalPERS school miscellaneous members is just $1,134.** Participating in voluntary tax-deferred savings through your 403(b) or 457 plan can result in the extra credit you need to maintain your pre-retirement lifestyle. The younger you are when you begin investing in your 403(b) or 457 plan, the more time you have to benefit from years of potential compounding growth.
- Starting without clear investment objectives. Many people start investing without defining their goals or estimating their timeline, and that's like studying without knowing what the test is about. Decide where you want to go and how you want to get there by knowing what you want to achieve and calculating how much you need to save to reach your destination. Use the retirement planning tools at ctainvest.org, including checklists and calculators.
- Investing too conservatively. If you have a long-term investing time horizon, you may be able to ride out the volatility of the stock market, which historically has offered better long-term returns than bonds or cash equivalents.*** But when selecting investments, some educators focus on fixed annuities for their guaranteed rate. But keep this in mind: According to Life & Health National Underwriter, as of December 2009 the average rate on a fixed annuity was 3.94%.† If inflation continues to run at an average annual rate of about 3%, as it has for the past several decades, then the real rate of return is less than 1%. Or, they choose variable annuities which tend to have the same risks as corresponding mutual funds but much higher fees. This can result in an underperforming portfolio that barely beats the rate of inflation. The key is to invest for the long term with a mix of investments that is appropriate for your goals, timeline and risk tolerance.
- Having too many investments. You want to diversify your investments so you spread your risk. However, if you have so many investments in your 403(b) or 457 plan that you can't keep track of them or too many in the same asset class, you could be exposed to too much risk and too many fees.
- Letting emotions drive your decisions. Have you panicked and made a snap decision to "drop the course" and sell investments? Or are you ignoring signs that the investment is not appropriate for you? Being too involved with your investments (such as trying to time the market) or not enough (such as avoiding rebalancing) can both be detrimental to reaching your investing goals. Learning more about investing can help you feel better about your choices and decisions.
Time for a Review?
If you identify with any of these mistakes, you are not alone. A financial advisor can help you review your investments and devise a strategy that is appropriate for your situation, making for a smoother ride toward the rewards you deserve. However, be careful when choosing a financial advisor. Some are sales agents who will simply try to sell you the product on which they receive the highest commission. Click here to learn more about choosing a financial advisor.
* Source: CalSTRS.com.
** Source: CalPERS.ca.gov.
*** Source: "Ibbotson® SBBI® 2008 Classic Yearbook," Morningstar®. Part performance is not a guarantee of future results.
† Source: Life & Health National Underwriter, www.lifeandhealthinsurancenews.com. Return is an average reported for a specific time period and is not meant to represent the return of any specific annuity. Past performance is not an indication of future results.