So you’re in your 50s, and retirement looks closer every day. But while you were saving for retirement, you’re now worried that you don’t have the amount of money you wanted and that maybe you need to re-think your investment strategy.
While you may feel panicked, don’t make the situation worse by making some common investment mistakes that will only aggravate your condition. Take time to evaluate the problem. Don’t think you can quickly get rich or compensate for suffering a loss by looking for the “hot” investment. It won’t happen.
“As we approach investing in our middle years, we should be more cautious with our decisions because we do not have the luxury of time that people in their 20’s have in terms of making up their losses. Therefore, investing in riskier asset classes is inadvisable for those that don’t have a wealth of experience across sectors,” Leslie Bocskor of the ArcView Angel Investing Network said.
Often, what looks like a lousy investment strategy indicates that the portfolio holds too many risky or illiquid assets (commodities, leveraged ETFs, limited partnerships) or concentrated positions (over-exposure to any stock, especially company stocks.)
According to Mathew Dahlberg of Main Street Investments, Kansas City, Missouri, “many pre-retiree clients we see are surprised when we show them they own total equity positions of 80% to even 90% of their portfolio. This often happens when people have too many accounts held by different firms. As a worker gets closer to retirement (people in their early-60s, for example), it becomes essential that they take steps to avoid a debilitating blow to their nest egg. Academic research shows that this is one of the most sensitive times determining whether savings will last once the person is retired. The most common mistake we see is that many older investors don’t know how much risk they truly are taking on. Sadly, much like 2008, many learn the hard way.”
Pre-retirement is also a precarious time because people in their 50s are often in their peak income periods.
Their years of experience are finally paying off, but they may also feel the impetus to make one giant killing before retirement. This poses problems, according to Darryl Daugherty, a fraud investigator based in Bangkok, Thailand.
“From my experience, people in the 50-59 age bracket are a primary target for almost all boiler room operations for a number of factors:
- The individual is generally at or near the peak of both their earnings curve and their savings curve.
- With retirement nearing, and insufficient planning, this age group may be more vulnerable because they have lowered their defenses against investments that promise high returns.
- Some people in this bracket have already started to experience a decline in mental faculties and may be more prone to make unsound investments.
- This age bracket may also have less time for research and lower familiarity with last generation technologies and can fall for buzzword investments, such as graphene, “nano,” or biotech.
The first step is to examine your portfolio. You may be surprised by what you discover.
Based on interviews with a dozen financial advisors, here are some of the worst investment and other money-related decisions a person in their 50s can make:
Being Too Conservative
The majority of financial advisors who responded cited this as being a common mistake. The reason: In today’s world, investors now assume all investment risks. But owning a conservative portfolio (one heavily weighted in bonds or cash) ignores the fact that stocks outperform bonds over almost all periods.
“For people in their 50s, retirement could last 30-40 years for many boomers, and the growth of their investment portfolio is integral to their ability to cover their financial needs in the future,” according to Eric J. Schaefer, Everway Investment Management, Arlington, Va. “Though inflation is considered in today’s environment, that won’t always be the case. Inflation in education, healthcare, and other areas is significant and will likely continue for years to come. While your account statement may not reflect losses, over time, inflation will eat into the purchasing power and true value of your retirement portfolio.”
Schaefer suggests an “appropriately allocated investment portfolio” with enough in cash or short-duration fixed income to cover multiple years of retirement spending (3 years to 5 years depending on age.) The balance should be invested in diversified global equities and alternatives. “While the equities and alternatives may be volatile in the short term, over time, they have a much higher expected rate of return. The bond and cash side of the portfolio provides the cushion and peace of mind to prevent an emotional reaction in a down market,” Schaefer said.
Avoid Illiquid Investments
Locking money up for over ten years is a bad idea, the advisors said, because it reduces access to investment and increases risk. Shorter time frames are most important in bonds since shortened maturities can reduce price volatility and improve liquidity. “We have never seen interest rates at these low levels. For someone looking to retirement who eventually will need yield, this is not the time to tie up money for a long period, no matter how safe,” Jeff Tomasulo, founder, and CEO of Vespula Capital, Greenwich, Conn., said.
The improved liquidity argument also makes it essential to avoid investing in private placement REIT’s or other similar vehicles “because of the potential of losing capital. Instead, investors in their Fifties should be looking to possibly invest in callable preferreds yielding 6% to 8% at or below the call price, according to Tomasulo.
This was also stressed by Mitch Reiner, president and CEO of Capital Investment Advisors, Atlanta, Ga., who said: “Illiquid investments, such as non-publicly traded energy investments, often boast of a great promise of yield and opportunity around oil wells or drilling pads, but when these investments are not valued daily, and you have no understanding of the true economics of the business, you probably shouldn’t be investing you last dollars before retirement. These investments are not typically regulated and are highly risky, he added.
Real Estate
Michael Clark, a CFP in Orlando, Florida, said real estate “can be a wonderful investment, but do not get a new 30-year-mortgage since you will be making payments well into your 
80’s. Time your mortgage pay-off with your retirement date; this way, you can avoid debt payments in retirement.”
Another danger comes from excessive borrowing at a later age. “While real estate is a great asset to invest in, I warn investors nearing retirement of the risks that leveraging yourself could bring if things don’t go right. Because you don’t have time to “recover” from a loss because you are too exposed to leverage at the wrong time (if a market turns), you will be looking for more work at age 65 as opposed to less,” warned Mitch Reiner of Capital Investment Advisors, Atlanta, Ga.
Annuities
Few investments generate as much emotional reaction as annuities. Whether fixed, variable, or immediate, annuities seem to elicit debate and some sad stories. Karen Benz worked as a new financial advisor for Wells Fargo Advisors in Long Island when she was sold an annuity from another Wells Fargo financial professional. Benz recounted that “I was coerced to purchase an annuity when I was 50. Not only did I pay high fees of over 3.5%, but the broker was incented with an up-front commission of over $15,000. It took me four years to dump it without heavy fees. Anyone under 60 should steer clear of any financial person trying to sell them an annuity.”
Fixed annuities are essentially the purchase of a contractual obligation from an insurance company. The life insurance company credits your account value with a fixed rate of return. This eliminates market-related risk, but in exchange for providing this guarantee, the life insurance company requires a minimum time commitment, usually 7-9 years, to custody the account. In addition to locking up your money for that period, you are also subject to a penalty if you withdraw some or all of your funds before the “surrender period” is over. When a withdrawal happens, your account is charged a surrender fee (continuing deferred sales charge, or “CDSC.”) Many investors are drawn to the perceived safety and interest rates, as they are currently higher than CD’s or the money market. These products are marketed aggressively during periods of volatility in the stock market by brokers.
“There are many reasons why a fixed annuity is not appropriate for someone in their 50’s. With interest rates near historic lows, contracts purchased in today’s environment will likely lock in a much lower fixed rate than may be available in the future,” according to Eric J. Schaefer of Evermay Wealth Management, Arlington, Va. “Many annuity contracts charge redemption fees of as much as 10% if withdrawals are needed during the surrender period. As we get closer to retirement and older in age, there is a natural increase in the uncertainty of our health and ability to earn income. Illiquid investments increase the risk of your retirement picture, even those with fixed interest rates.”
Immediate annuities also pose a problem, according to Jeremy S. Office, Ph.D., of Maclendon Wealth Management, Delray Beach, Fla. In an immediate annuity, the purchaser gives an insurance company a lump sum of cash and receives payments until they die. “While this may sound attractive initially if terms are not in place, the insurance company stops payments after your death, which could be a large portion of your initial investment,” Office said.
Universal Life Insurance Policies
Because life insurance is a crucial investment to ensure your family is financially secure in the event of accident or death, many life insurance producers push life insurance contracts as tax-advantaged investment vehicles. Many investors are attracted to universal life policies because they provide both a life insurance benefit and a built-in investment component. The investment piece is particularly attractive since dividends, interest, and capital gains are not taxed in the current year. For high-income earners, in particular, this tax feature concerning investment income can result in thousands of dollars a year in savings. But there is also a problem.
“People in their 50s who consider using life insurance to create tax-free income should be careful because it will take, typically, at least ten years for sufficient cash to build within the life insurance product. If you find yourself needing funds earlier, you cannot have access to them without jeopardizing the life insurance itself,” according to Steve Lewit of United Advisors, Buffalo Grove, Illinois.
There is also a problem with how insurance companies calculate your premiums. “In a permanent insurance policy, as long as you pay your premiums, the policy should never lapse,” Schaefer of Evermay Wealth Management, said. “This means the insurance company calculates your premium for the life insurance component with the expectation of paying your death benefit at some future point. The premiums can be very high in comparison to comparable term insurance. In addition to the premiums, the policies often carry administrative expenses ranging from 1%-3% annually, which reduces the earnings in the investment account.
Schaefer also said he does not recommend universal life as an investment because of the tax treatment of future withdrawals. “As many taxpayers know, capital gains and qualified dividends in a taxable investment account are taxed at 15% or 20%, depending on adjusted gross income. As investors, we do not pay tax on our initial investment, only earnings. The same goes for future withdrawals from life insurance contracts that are tax-free up to your basis, or total net investment, in the account.
Unfortunately for universal life policyholders, earnings in excess of basis are taxed as ordinary income rates. With the top federal tax rate now at 39.6%, the difference in being taxed at 20% now vs. almost 40% later will significantly reduce the after-tax value of the investment.” Earnings also may be subject to a Medicare net investment income tax of 3.8%, he added.
Annuities, cash value insurance, hedge funds, private equity, and even some mutual funds that can have fees as high as 3% annually were also flagged as being unsuitable investments by Franklin Parker, Chief Investment Officer of Brightwealth Management Co., Lewisville, Texas. Parker said these fees “can drastically erode your investment returns. Most people in their 50s have begun to save heavily, so reducing the investment return by high fees can hurt your ability to achieve your goals.”
Important Non-Investment Issue to Consider for People in their 50s
Remember Medical Expenses
Since medical expenses become greater as we age, Michael Clark, CFP, in Orlando, Fla., recommends that pre-retirees save for future medical expenses in your health savings account (HSA). This will keep you from making out-of-pocket expenses.
Getting Married Without A Prenup
“Many people in their 50’s are getting married for the second time. It is crucial to meet with an estate planner before you tie the knot. If you don’t take proper precautions, it can get horrid if things don’t work out, which can result in the loss of a good portion of wealth. Make sure your estate is protected and that your will is in order and clear. Jeff Tomasulo is the Founder and CEO of Vespula Capital.
Remember: Women Live Longer Than Men
Since women are outliving men (the average 65-year-old woman today will live past 86 vs. 84 for the average man), more women are likely to be widowed. Forty percent of women over age 65 were widowed in 2010, compared to 13% of men. Since women historically have earned less than men, they may also receive smaller Social Security benefits in retirement. This makes it more important for married women to become more familiar with the retirement and estate planning processes and how assets should be managed when their partner passes away.
Lending to Children and Relatives
This is a touchy subject at any age, but lending to relatives, no matter how close or distant, is a mistake for people in their 50s. “We all want to support our children in each of the endeavors, but the likelihood of success in any startup or small business is very low,” according to Reiner of Capital Advisors. “Do not leverage your retirement on the hope, belief, or love that you have for your child or relative and their maybe-possibly-probably-not good business idea.
It’s Not Too Late To Save More
Thanks to some IRS rules, if you have a 401(k) plan and are 50 or older, consider taking advantage of the IRS’s catch-up contributions. These rules allow you to contribute an additional $6,000 to your account for a total of $24,000 in 2015, suggests Yvette Butler, President of Capital One Investing.
Butler also said pre-retirees should think about what’s changed since you first established your retirement portfolio 20 or 30 years ago. “Then, make sure your investment allocation reflects your current goals, risk tolerance, and timeline. If you haven’t been periodically rebalancing your portfolio, now may be a good time to review your strategy with a financial advisor. A financial advisor can also talk you through decisions like rebalancing, rolling over an IRA, establishing a trust, or beginning to de-accumulate assets.”
If you are starting to save for retirement in your 50s, don’t invest in a Traditional IRA or 401(k). The reason, according to financial author Steve Burgess, is that you have to pay taxes when you withdraw money from a traditional IRA or 401(k). “That’s why it is a wise decision to invest in a Roth IRA or Roth 401(k) retirement plan instead,” Burgess said.
