Proper planning is important when it comes to managing your finances. It’s also important to make sure that you don’t make any decisions that will negatively impact your wealth and, in the long term, retirement income. Read on for our top 7 mistakes that can deplete your wealth significantly:
Investing Blindly
According to Craig Croft-Rayner, independent financial advisor at LFBB, one of the biggest mistakes that investors make is investing in areas that they have no knowledge or experience in. “The internet is full of investments that offer great returns with no risk, this is just unrealistic,” Craig says, “If it seems too good to be true, then it probably is.” For most investors and pension savers, it makes more sense to hold investments with a long track record with well know institutions that offer financial security, but can still deliver sensible returns.
Investing emotionally
Unfortunately, many people tend to make emotional and panicked decisions when it comes to investing. During the recent covid crash, many investors sold down their investments as the stock markets crashed. This crystallised losses and allowed no chance of recovery. Those that held their nerve and their investment positions are now likely to be financially much better off than they were pre covid. When it comes to investments, it is time in the markets and not timing the markets that wins out every time.
Lack of Diversification
Ideally you don’t want to have all of your retirement eggs in one basket. For example, owning buy to let property can be great and generate good income in retirement but can cause a headache when trying to mitigate inheritance tax. With further regulation in the buy to let market, are you better off selling and looking elsewhere for investment returns? Is your business your retirement nest egg? If so, what happens if the valuation suddenly decreases like we have seen across many sectors during the recent covid crisis? Diversifying investments across different asset classes is the best way to protect your wealth.
Using Your Home as a Piggy Bank
Loans secured against the home are often taken on when people want to finance different goals, such as buying a car or paying off credit card debt. In reality, the equity in your home is much better being left preserved and used to supplement retirement income later in life. Craig says, “there are now lots of competitive equity release products available that allow those with insufficient pension savings to top up their retirement funds using their home.”
Accessing your Pensions early
It might be tempting to release tax free lump sums or even start taking an income from private pensions before you stop working. However, this could significantly harm your retirement income potential long term. Even in retirement, just because you are entitled to a lump sum, do you need it? Is it better off being left invested to benefit from compounding investment growth? Taking an income from your pension whilst you are still working will also likely lead to significant tax deductions which could be mitigated or avoided with proper planning.
Lack of Emergency Funds
Whilst we are working and doing well financially, we might not be thinking of unexpected bills or an economic crisis. If you prioritise saving some of your income each month to build up a healthy safety net, you will thank yourself later. We normally recommend an emergency fund, held in cash, equivalent to around 6 months of income. On the flip side, if you are holding cash reserves in excess of this, are they better off being deployed elsewhere such as pensions to obtain additional tax relief?
Being too Cautious with Pensions when close to retirement
The temptation is to move all of your pension savings to cash before you retire. This can really harm your long-term income potential, particularly in the low-rate interest environment we have been in for over a decade. The result is that your money loses value year on year against inflation. With modern pension flexibilities, pension savings are better off left invested up to and throughout retirement. Work with a financial advisor to create a portfolio that protects against market losses whilst still seeking inflation beating returns to protect your wealth and retirement income.
If you are looking to plan for retirement or want a review of your current investments, have a free financial review with one of our independent financial advisors at LFBB. Contact our team on 0114 272 9721.