Retirement Savings Mistake: What Happens When You Only Utilize a Regular Brokerage Account

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When it comes to retirement planning, there are various strategies for investing your money to ensure you can enjoy your golden years without stressing about your finances. While everyone has their own unique way of investing, it’s crucial that you don’t make this retirement savings mistake: You don’t want to only utilize a regular brokerage account for your retirement funds.

What are you missing out on by only having a brokerage account for your retirement savings? What are the disadvantages of not diversifying your retirement savings? GOBankingRates contacted retirement planning experts to gather their insights to help you with your planning. 

You’re More Vulnerable to Market Volatility

Taylor Kovar, CFP and CEO of Kovar Wealth Management, pointed out that having a single brokerage account instead of a diversified retirement portfolio leaves you more vulnerable to market volatility. “If the investments within the account are heavily concentrated in specific sectors or asset classes, any downturn in those areas can significantly impact the overall value of the retirement savings.”

Another retirement expert echoed a similar sentiment.

“The primary risk of not diversifying retirement savings is increased exposure to market volatility,” commented Eliza Arnold, CEO of Arnie. “If your investments are heavily concentrated in one sector or asset class, a downturn in that specific area can significantly impact your entire portfolio’s value.”

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Arnold elaborated, “A lack of diversification means potentially missing out on various growth opportunities offered by different markets and asset classes. Each of these has its own growth trajectory, and being invested in just one type might mean missing the chance to capitalize on others.”

You Miss Out on Growth Potential

“Diversification allows for exposure to a variety of asset classes, each with its own growth potential and risk profile,” Kovar brought up. “By only having a brokerage account, an individual might miss out on other investment opportunities like bonds, real estate or international stocks, which could offer different growth potentials and risk mitigation.”

Kovar stressed the importance of growth opportunities that may not be available to you if you just use a regular brokerage account. “A well-diversified portfolio includes a mix of stocks, bonds and other assets, which can balance out the risks and returns. Without diversification, retirement savings might be skewed too heavily toward high-risk or low-growth investments.” You don’t want to struggle with your income in your golden years because you didn’t invest accordingly.

You’re Not Hedging Against Inflation

“Diversification can also provide a hedge against inflation,” Kovar shared on one of the most important issues of 2023. “Certain asset classes, like real estate or commodities, may offer better protection against inflation compared to a portfolio solely composed of stocks.”

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Anyone planning to retire in the near future can’t ignore the role of inflation when it comes to investment returns. With the cost of living going up, you have to earn higher returns on your money to ensure that your money’s not losing value. If you don’t hedge against inflation, you will have income issues in your retirement.

You Miss Out on Multiple Retirement Income Streams

“Relying on a single brokerage account may limit the potential for generating multiple income streams,” Kovar warned. “Diversified portfolios can include dividend-paying stocks, interest-bearing bonds and other income-generating assets, providing a more stable and varied income during retirement.”

You don’t want to rely on just one income stream when you exit the workforce, because you can’t predict the market’s future.

Can Be Risky When Close to Retirement

“A non-diversified portfolio tied to the stock market’s performance can be risky, especially as one nears retirement,” Kovar mentioned. “Diversification helps in reducing this dependence, offering more stability and predictability in retirement income.”

The closer you get to retirement, the more critical it becomes to ensure that you have stable income streams so that you can live your desired lifestyle. If you’re close to retirement, you don’t want to rely on just a regular brokerage account to fund your golden years.

Lower Long-Term Returns

“A non-diversified portfolio often lacks balance between risk and reward,” commented Arnold. “This imbalance can lead to a retirement savings strategy that is either too risky or too conservative, which in turn could result in lower long-term returns.”

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When planning your finances for your retirement, you want to do whatever you can to get the possible returns so that you don’t have to return to work. A regular brokerage account could lead to lower long-term returns on your money.

A Lack of Tax Efficiency

“One significant drawback is the lack of tax efficiency,” Arnold said. “Unlike 401(k)s or IRAs, brokerage accounts don’t offer the same tax advantages, which means any capital gains or dividends are subject to taxes, potentially reducing the overall returns.”

A significant component of retirement planning involves tax strategy — you want to ensure that you have access to your money. You have to factor in the role of taxes on your retirement income, since this is one aspect of financial planning that you can’t avoid.

You Miss Out on Retirement-Specific Benefits

“Brokerage accounts miss out on retirement-specific benefits, like employer matching contributions and higher contribution limits available in retirement accounts,” Arnold remarked. When you only utilize a regular brokerage account, you’re missing out on other financial benefits that could affect your retirement income situation.

Closing Thoughts

“In essence, while a brokerage account is a valuable tool for financial flexibility and investment, it’s crucial to complement it with diversified retirement savings strategies,” Arnold remarked. “This approach ensures a balanced and robust portfolio, optimizing long-term growth, minimizing risks and maximizing tax benefits.”

After reading this article, hopefully, you’ll avoid making this retirement savings mistake. You’re also going to want to work with a retirement planning professional to ensure that you have a plan for when you leave the workforce so that you never have to stress about money.

Are You Retirement Ready?

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