5 Strangely Common Mistakes People Make With Their Retirement Money

Following Seminar Advice on Things You Know Nothing About

Woman raising hand in seminar
Don't fall for slick seminar presentations! That's a retirement money mistake you must avoid. BraunS/iStock

The stakes are higher as you near retirement. You don't have time to make up for errors in judgment. That's why it's critical to know what common mistakes you'll want to watch out for. As a practicing retirement income specialist, I've seen it all. Here are five mistakes that I've seen far too often over the last 20 years. 

1. Following Seminar Advice on Things You Know Nothing About

In 2007 one of my clients, an airline pilot, called me a month before he retired and told me he wasn’t going to need to withdraw any monthly income from his IRA as we had planned.

"Why?" I asked feeling quite surprised.

He told me he invested $80,000 in a currency trading program that was paying him out $4,000 a month. I got a sick feeling in my stomach. That would equate to a 60 percent a year return. I knew that wasn't possible on a sustainable basis. It paid out for four months and then the company went under. It turned out it was a big Ponzi scheme. He got a tax write off for the loss, and a few thousand recovered years later in court. That's it. 

He'd heard about the strategy at a free seminar.

What Should You Do Instead?

If you want to dive into alternative investments, or anything you don't know a lot about, take the time to learn as much as you can first. Then do it in small increments. Try reading Fast Profits in Hard Times by Jordan E Goodman. It provides a great introduction to 10 non-traditional investment options.

Betting on a Stock

Portrait of senior businessman listening to smartphone in front of financial digital display.
A big mistake people make is betting on a stock. Cultura RM / Steve Prezant / Getty Images

I once watched a successful salesman in the medical field who was five years away from retirement put nearly all his money in a stock he said was a “sure thing”. I tried to talk him out of it, but the stock was in the medical field and he felt he knew the industry well. All the docs he worked with were investing in it — he thought he should too.

The stock stagnated over the next few years. If he had put his money in a traditional diversified index fund portfolio it would have posted healthy gains. He didn’t lose money in the traditional sense, but he ended up over $100,000 short of where he would have been if he had invested in a diversified portfolio that was part of a long-term plan. 

What Should You Do Instead?

As exciting as the thought of big gains may be, you need to think of such an approach like going to Vegas and betting your retirement money on red or black. If you like the thrill, do it with small amounts of play money, not with the bulk of your retirement funds.

Check out What Would I Do - Buy Individual Stocks or Stock Index Funds? for a thorough analysis that will help you understand the difference in risk levels of owning a single stock or an index fund. 

Thinking You're Smarter Than the Market

USA, New York, New York City, Trading desk with computers and phones.
Some people believe their special skill for predicting the future is a retirement plan. Tetra Images / Getty Images

Somewhere near 2010 I spoke with a retired real estate guru who had liquidated his $6 million real estate portfolio at a good time several years back. He had been so successful at real estate that he decided he could just as easily turn his talents to the stock market. Within three years, he had day-traded his account down to $3 million.

He came to see me thinking a “professional” investment advisor would be able to trade it back up to its original value within a year or two. He was looking for an investment advisor who could time the stock market the way he had timed the real estate market. I told him that wasn't me. I don't make promises I know I can't keep. Seriously, buddy? If it was that easy, why would I need clients?

What Should You Do Instead?

There's a lot of smart people placing trades every day —​ and for each trade only half can be right. I don't care how well you did in your prior profession —​ that doesn't translate into market timing skill. Investing is a process. That process has a name, which is called asset allocation. The process works, but only if you use it. Learn the basics in Market Timing vs Asset Allocation.

Making Risky Loans With Too Much of Your Net Worth

Graph showing high percentage returns on investment.
High yield investments are fine - but only for small portions of your retirement money. KTSDESIGN / SCIENCE PHOTO LIBRARY / Getty Images

I had a client who was a 62-year-old contract attorney. He liked a concept that I introduced him too — the idea of making private loans. These loans paid 10 percent plus yields, but also came with risk. We agreed that it was okay for a small percentage of his portfolio (less than 10 percent). After a year, he decided his entire portfolio should be composed of private loans. I did not agree and so we parted ways. He moved all his money into this strategy. A year later the company making the loans went bankrupt. Although he may recover some money years down the road, for the most part, he lost it all.

What Should You Do Instead?

There are numerous types of investment that offer high yields. Private loans are one of many items on my high yield investment list. If you go for a high yield strategy, diversify. Don't put all your retirement money in one strategy. Risky investments should compose only small portions of your retirement money.

Putting Too Much in Illiquid Real Estate Deals

Brief case with real estate deals inside of it.
Be aware that real estate deals can tie up your retirement money for a long time. JanStromme/Stone/GettyImages

When I worked for a CPA firm from 2001 to 2004, one of our retired clients was a dentist who had lots of friends putting together real estate deals that promised 20-26 percent returns. What was the risk? Real estate only goes up, right?

He invested a huge chunk of his retirement money in these deals. Unfortunately, they didn't pan out. Such real estate deals are not liquid. When the deals don't work there is nothing you can do but wait until hopefully some day the real estate project sells and you get some money back. This client spent many years with almost no income and an asset that would remain frozen until the real estate market recovered and/or the land was sold or developed.

What Should You Do Instead?

Perhaps real estate can be a good addition to a retirement portfolio when you are smart about it. Putting a lot of money in a non-liquid investment where you have no control is not so smart. Instead consider investing in Real Estate Investment Trusts, or purchasing an investment property with a modest operating account for problems when they arise.

The Bottom Line

Your retirement money is not for gambling. It needs to provide you with a reliable and consistent stream of income. Before you invest in something new, take the time to lay out an investment plan and be serious about it. If you don't, you have no one to blame for your losses except yourself.