Money Matters: Do's and don'ts in planning for retirement

Don't be shortsighted when it comes to planning for retirement. When you're making financial decisions, especially for your golden years, you definitely want to make them with a long-term perspective.

One of the first realizations people must consider is that retirement could encompass a period of 20 to 30 years for some people. It's much better to be safe than caught short.

When it comes to making a financial plan for retirement, you shouldn't allow yourself to be swayed by today's headlines. With that in mind, let's take a look at the dos and don'ts of financial retirement planning.

Do account for inflation and interest rates

You can't embark on any financial undertaking these days without wondering about how rising inflation and interest rates will affect your investment. Planning for retirement is no different. The main thing people need to remember is that you're investing for a future point in time — not the next year or two — and while there always will be ups and downs in the market, growth remains strong over time.

Many of you reading this article might remember purchasing homes in the 1980s with anywhere from 10 to 15% interest. The 50-year historic interest rate, for example, is around 7%. Inflation, historically, has been just over 3.5%. The latest consumer price index rate registered at 4.9%, which is a lot lower than it has been, but still a bit higher than the historic inflation average.

The low inflation and low interest rates that we all benefited from and enjoyed from 2010 to 2020 were artificially held low by the government to stimulate the economy. What we're dealing with now are the natural ramifications, the cause and effect, of having artificially low interest rates and inflation for so long. In other words, these rates are getting back to normal, where they should have been all along.

The problem is that many people tend to have a short memory: They're forgetting what it was like to live in the 1980s, 1990s and even the early 2000s. Buying a home at 6 to 7% interest is average over the last 50 years. The days of 2.5% interest rates are gone. People need to adjust their pocketbooks to today's reality, which is that we're going to be dealing with 3 to 5% inflation for quite some time, and interest rates are going to be around 5 to 6% because that is what's healthy for the economy.

How do people do that? They need to get back to the fundamentals of paying off debt faster. With lower interest rates, you have the option of deferring your debt and paying it off over a longer period of time. But not so now. As the popular saying goes, "Compound interest is the best servant and the worst master."

Don't politicize your portfolio

Regardless of how much each side wants to blame the other, Democrats and Republicans are almost equally to blame for the national debt. The reason we say not to politicize your portfolio is because the market actually performs best in a mixed government, i.e., when both Democrats and Republicans are in power. It doesn't matter who is in the White House for stock market returns. We like to think it does, but it really doesn't matter as much as people think.

At the end of the day, the market rewards change. It rewards innovative thinking and people who change the way we live.

Anyone remember Fisker Automotive? The government invested heavily in this green car company that was founded in 2007. Fisker was supposed to deliver a luxury hybrid car. Despite a loan from the Department of Energy to the tune of $528 million, the company flamed out and actually delivered only a few thousand cars before going bankrupt. But then Elon Musk came around and figured it out on his own. He didn't take a lot of government money to do this, and he created Tesla. The market will pay a premium for people and things that change the way we live. Musk is one of the richest men in the world because he changed the way that we view cars.

There are plenty of other examples as well. Jeff Bezos of Amazon has changed the way that we shop. Netflix has changed the way that we view content. Whatever people want to say about investing green or other cause-based investing, the market doesn't really care about that. The market does care about dollars and cents, and that is based on the way we spend and the way that we live.

It's awesome when the companies that do the best for everybody and the environment also do well with a stock market return. But most people don't invest in a company because they have good headlines or a good carbon footprint. They invest in a company because they believe they are going to be around for the long term and have profits for their investors. That's what investors are looking for.

Do keep investing in your 401(k)

Most people recognize that maintaining a 401(k) is a primary requirement in planning for retirement. The reason it is such a good investment vehicle for most people is they can set the amount of their payments, pretty much forget about it and continue paying into it automatically over the years.

With that in mind, the most important thing most people can do is to just max out their retirement savings by dedicating 10 to 20% of their income. For people with under $1 million in their retirement accounts, the No. 1 driver of financial success is the amount of money you save as opposed to the amount you earn. It's not about earning a high return some years or avoiding a low return in others. It's all about saving consistently and gaining interest over time.

One thing to remember is that stock market returns always gravitate to the average. The market is a story of highs and lows, feast or famine, and you need to exhibit patience. It's not a matter of if we will see financial storms but when we will see them. If you have the right financial plan and the right adviser, you should be positioned for success.

Don't let fear keep you on the sidelines

When it comes to investing money, it's understandable that there is a level of uncertainty and fear involved. There's a lot going on in the world, and fear is quite prevalent in today's headlines. Over time, however, most fears have almost always proven to be unfounded in terms of investing.

If we examine the economy historically, there are always reasons that can make people hesitant to invest. Just look at the past 10 years: We had the COVID-19 pandemic in 2020, a trade war with China in 2018-2019, the Greek debt crisis of 2015 and the fiscal cliff we faced in 2012, not to mention myriad natural disasters over the past decade. Those were all reasons people used to curtail investments. However, over the past 10 years, the stock market has more than doubled. If you let fear control your financial decisions, you'll find yourself sitting on the sidelines way too long, and your portfolio will miss out on a tremendous amount of growth.

American business magnate Warren Buffett famously said, "Be fearful when others are greedy and greedy when others are fearful." The fear of recessions is big, but a recession is really a natural economic event that happens all the time. One reason we're so afraid of recessions is because the last one we had was the Great Recession of 2008. Not all recessions are created equal, but they are a natural, healthy part of an economic cycle. Recessions allow the economy to recover and get the natural rest it needs so it can continue on to the next expansion period.

I recommend finding a high-level fiduciary advisor that can help hold your hand through these scary headlines and scary times alike. The reality is that most of the headlines and most of the fear that people are selling don't often come true. Sometimes it does, but you can't let that fear control your emotions. Because if you let emotions and money become commingled, more often than not, you'll make the worst financial decision.

As you put your individual retirement plans together, remember the dos of steadily growing your savings and 401(k) while paying off debts quickly to offset rising interest and inflation rates. At the same time, for the best retirement results, don't let fear or politics affect your investment strategies along the way.

Greg Merrill is a financial advisor at Merrill Financial Associates, which offers fee-only, fiduciary investment management and is located in Provo, Utah. This article is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any investment product. Merrill Financial Associates is located at 3549 N. University Avenue, Suite 175, Provo, UT 84604, and can be reached at (801) 356-7100. Advisory services are offered through Commonwealth Financial Network®, a registered investment advisor.