3 Retirement Mistakes You May Be Making Right Now

People who faithfully stash away money for retirement do so in hopes that their post-working years will be, relatively speaking, a stress-free environment where they can enjoy the fruits of decades of hard work without concerns about running low on cash.

But pitfalls lie in wait for the unwary. As you near or enter retirement, be alert to these three common mistakes:

Investing like you’re still working

As you approach retirement, you need to adjust your mindset about your portfolio. Up to this point, you may have been aggressive, willing to take calculated risks that helped grow your money. That approach may have become deeply ingrained in you, making it a habit that is hard to kick.

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But it’s time for a behavioral change. Portfolio growth is no longer the top priority. Instead, it becomes more important to preserve what you have and think about creating income for your retirement.

Unfortunately, some people hitting the retirement red zone – the roughly five years right before and right after their target retirement age – don’t realize it’s time to ease up on the investment gas pedal. Or they just can’t break those old investment habits. One way to do that is to begin to reduce your stock exposure.

If you don’t, here’s what can happen: When you retire and that weekly paycheck ends, you will begin withdrawing money from your investments to live on. Imagine the results if we hit a recession and the market takes a plunge. Suddenly, your account balance is suffering a double blow. The bad market combined with your withdrawals can drain your savings quickly. If you haven’t retired yet, you can fix these problems by perhaps saving more or working longer. Once you are in retirement, your options start to thin out.

Failing to be proactive in preventing a big drop in your portfolio.

Once you have made that psychological adjustment about how you will approach investing, it’s time to take some specific actions. You want to be proactive now, not wait until you are in retirement, the market drops, and you are scrambling. At that point, it’s too late.

I mentioned the retirement red zone that begins when you are about five years out from retirement. That’s the opportune time to shift more of your money into stable assets, such investments as CDs, bonds or fixed-index annuities. But don’t eliminate your stock exposure completely. Even though growth has dropped further down your priority list, you still want room for some growth that those stocks provide. You just don’t want to be in a position where a big market drop derails your entire retirement plan.

Work with your financial professional to make sure you understand your potential portfolio losses and to make sure your plan will still fund your retirement needs for 30 to 35 years, even with a big market drop. For example, a portfolio could be designed so that, even if the market dropped 50%, you might just endure a 15% loss. Then you and your adviser would gauge whether you could tolerate such a loss.

Another way to be proactive is to rebalance your portfolio after big gains in the market during retirement. You don’t want to lose those gains, so after a good run, you should shift some of your “winnings” into more stable assets.

Thinking retirement means a lower tax bracket for you.

People often anticipate that in retirement they will drop neatly into a lower tax bracket and the IRS will claim less of their money. Sadly, this is not necessarily so. The most popular way to save for retirement is through tax-deferred accounts, such as a 401(k). But if all your money is in a 401(k), and like most people you would prefer to have more income in retirement than you do now, you are never going to be in a lower tax bracket. You’ll be in the same bracket – or possibly even a higher one. Yet, the conventional wisdom is to keep adding money to a tax-deferred account, even though Uncle Sam looms as the piper who needs to be paid at some point.

When I do live presentations, I ask people this: Do you think in 10 or 20 years, taxes will be lower or higher than they are now? Everyone predicts higher. But think about that. Many of them are choosing to defer paying their taxes to a later date, yet at the same time they are certain taxes will be higher then.

That’s why now is a good time to begin moving that money into a tax-free bucket, whether that’s a Roth IRA or perhaps indexed universal life insurance. You pay taxes as you make the conversion, but those taxes are likely to be less than you will pay if you defer them. (For more, please read Your Guide to Roth Conversions.)

Many people think they have a retirement plan by virtue of saving money, but a portfolio is not a plan. If you don’t proactively take control of where you are headed and what you need to do to get there, you can end up making mistakes that can cause great damage to your retirement.

Some people manage fine on their own, but if you don’t feel confident about your ability to avoid the potential perils of the retirement red zone, check with a financial professional for guidance. The sooner you do, the better the odds that retirement will be what you always hoped it would be.

Ronnie Blair contributed to this article.