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How to Retire With Absolutely Nothing

My friend's mother, Paige, is a swell lady. She's loving, devout, and embodies the virtue of hope.

But she is a horrible investor -- and because of that, she's now living a nightmare of a retirement.

Bypassing all "yo momma" jokes ...
Rewind to the past: Paige grew up as the daughter of a wealthy architect. Needless to say, she never lacked anything. And her father, being the astute businessman that he was, obsessively invested any extra cash he had in the stock market. Upon his death, this massive portfolio of stocks was divvied up between his three children.

Fast-forward to the present: Despite that inheritance, Paige lives in a tiny duplex she rents, relying for her income solely on a monthly Social Security check. She has no savings. 

What went wrong?
No, the stocks she inherited didn't plummet. No, she doesn't have a proclivity for gambling. And no, she was never the object of a massive burglary.

But she never planned for retirement.

I discussed Paige's situation with our retirement expert Robert Brokamp, advisor of the Rule Your Retirement service, and he pointed out three critical mistakes she made -- mistakes that you, in turn, should avoid:

She thought Social Security would be enough.
And because she thought Social Security would secure her retirement, Paige never saved a dime of her income.

At the very least, she should have contributed a small percentage of her income annually to an IRA, which she then should have invested in a domestic index fund like Vanguard 500 Index (VFINX), which invests in large-cap stocks like ExxonMobil (NYSE: XOM  ) , General Electric (NYSE: GE  ) , Procter & Gamble (NYSE: PG  ) and Apple (Nasdaq: AAPL  ) .

For diversity, she could have added some small-cap holdings by investing in a fund like Royce Select I (RYSFX), which owns shares of Copart (Nasdaq: CPRT  ) and Plexus Corp. (Nasdaq: PLXS  ) .

Investing in tax-free retirement accounts is the easiest (and first) step one should take toward planning for retirement.

She sold the stocks she inherited.
Upon her father's death, Paige cashed out all the investments she received. Had she held onto just one of the stocks in her father's portfolio, say Bank of America (NYSE: BAC  ) , the annual dividends would be valued at around $40,000 -- less than the median household income in the U.S., but much more than the amount she receives in Social Security.

Had she held all the stocks she received for the long term, the annual dividend payments would today place Paige in the top 5% of American households for annual income.

She let inflation get the best of her.
Paige's money has not kept up with prices. The Senior Citizens League recently reported that expenses for retirees are up 88% since 2000. The increase in Social Security payments over the same period? Just 24%.

In other words, Paige's monthly check from Uncle Sam is buying her less and less over time -- and pretty soon, it could get her next to nothing. Brokamp advises retirees to keep a portion of their savings in safe bonds that adjust for inflation through a mutual fund like Vanguard Inflation-Protected Securities (VIPSX).

The Foolish bottom line
Living a comfortable retirement is not all that hard. But, as the example of my friend's mother shows, if you don't plan for retirement, you're in for some tough times.

This isn't intended to be an airing of grievances (after all, Festivus is months away). Rather, I hope that by sharing the mistakes she's made, I'll be able to help you avoid the situation she's trapped in today.

So, dear reader, I must ask: Do you have a retirement plan? If not, or if you're wondering whether your plan is comprehensive enough, consider joining the Rule Your Retirement service. You can even click here to get a 30-day free trial -- and read through all of Robert Brokamp's advice completely free.

Adam J. Wiederman really does like his friend's mother, just not her failed retirement strategy. He owns none of the stocks mentioned above. Apple and Copart are Stock Advisor recommendations. Plexus is a Hidden Gems Pay Dirt selection. Bank of America is an Income Investor choice. The Motley Fool owns shares of Copart. Even the Fool's disclosure policy has a retirement policy.

Read/Post Comments (3) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 23, 2008, at 12:08 AM, rebel1970 wrote:

    Bummer: I'm in a similar situation as Paige, except I work full-time and getting tired, so when I saw the headline: "How to Retire with Absolutely Nothing"! I was expecting to find some secret solution. This was not a helpful story, at least not for someone like myself, or Paige obviously. Of course it's good for those who have some time to go before retirement rolls around.

    I'm sure there are no solutions for people like us, but what a misleading Headline! It should have been "Don't Even Think About Retirement with Absolutely Nothing", that would have been closer to the truth!

    Bah! Humbug!

  • Report this Comment On June 23, 2008, at 9:59 AM, DecaturHeel wrote:

    Yes, retiring with nothing would INDEED be a Festivus miracle! And we know how THAT worked out for Kramer...not so well!

    And speaking of Festivus...

    Since it's "officially" observed on Dec. 23, it's only six months away!

  • Report this Comment On June 23, 2008, at 11:10 PM, thedofca100 wrote:

    It's a great story but all the planning in the world is often destroyed by big business and their goals to have the executives take most of the money. My husband worked for 39 years at United Airlines. At one point we had over $500,000 in company stock and he was contractually guaranteed a retirement of over $100,000. Management took the company into bankruptcy and cancelled employee pensions. The stock was also cancelled. At no time, because the stock holdings were in an ESOP, was he allowed to sell one share of stock. He also was not allowed to take more than 15% of his retirement fund out. Guess what. All the planning in the world won't help you. Yes, fortunately, we are savers and property investors. We will be fine. Still, I often wonder what difference it all makes. I still believe either business or the government will get the 25% of his original pension that the PBGC covered and will manage to get our investments as well. I say spend and enjoy your youth and quit worrying about old age. Read "Waiting for Snow in Havana" and see how quickly it can all go. We have seen it. These stories are just another way for money managers to get their hands on your money or the stock market to manipulate it away from you.

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