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4 Ways to Destroy Your Retirement

In 2008, the stock market had its worst year since 1931.Given that returns have continued to be brutal in '09, and with constant chatter about "the second Great Depression," it should surprise exactly no one that many Americans are worried about retirement.

As it turns out, they should be. According to the 18th annual Retirement Confidence Survey, conducted in April 2008 (before this mess really got going), less than half of workers have attempted to calculate how much money they will need for a comfortable retirement. That means that over half of the working population hasn't even attempted to run the numbers! Not only that, but the survey goes on to report that 46% of workers have a total savings of less than $50,000. Twenty-two percent say they have no savings at all.

In addition to insufficient savings, future retirees will have to deal with rising health-care costs, unreliable Social Security benefits, and underfunded (or nonexistent) pension plans. Robert Brokamp, advisor of the Fool's Rule Your Retirement newsletter, warns against these four common mistakes that can lead to a disastrous retirement:

1. Plan too late.
Studies have shown that the length of time you invest has more of an impact than the amount you save. An investor starting in her 30s or 40s has to save significantly more to catch up. According to the U.S. Department of Labor, it's three times as much for every 10 years of delay.

Robert suggests calculating how much you will need in retirement according to inflation, your lifestyle, and any retiree benefits you expect to receive. Then calculate exactly how much you need to sock away per month to meet your goal.

2. Don't save enough.
It's no secret that we have become a society of consumerism, constantly trying to keep up with the Joneses. The average American currently saves about 3%, while other industrialized nations such as France and Germany have a savings rate of about 10%.Take a look at the eye-opening chart below, which Columbia Business School professor Bruce Greenwald recently shared during a talk at Fool HQ.

 

Year

Disposable Income (nominal)

Savings Rate

1970

$695

10.6%

1975

$1,096

10.9%

1980

$1,822

8.3%

1985

$2,720

9%

1990

$3,840

7%

1995

$4,976

4.6%

2000

$6,739

2.3%

2001

$7,055

1.8%

2002

$7,351

2.4%

2003

$7,704

2.1%

2004

$8,212

2%

2005

$8,742

(0.4%)

Clearly, saving is not a priority for Americans. But if you would like to retire, ensure the discipline to save by having your monthly contribution automatically deducted from your paycheck. It's less painful to part with, and you'll never skip a month.

3. Don't invest wisely.
Asset allocation plays a very important role in retirement planning. The theory is simple: Don't put all your eggs in one basket. This means diversifying your portfolio to include the five major asset classes (large-cap stocks, small-cap stocks, foreign stocks, bonds, and REITs). The amount you allocate to each will depend on your risk tolerance and number of years from retirement.

For example, Robert's "Fool's Rules for Asset Allocation" shows suggested allocation for a conservative, moderate, and aggressive investor:

Asset class

Examples

Conservative

Moderate

Aggressive

Large-cap stocks

Procter & Gamble (NYSE: PG  ) ; Google (Nasdaq: GOOG  )

20%

35%

50%

Small-cap stocks

Chipotle (NYSE: CMG  ) ; Jones Soda (Nasdaq: JSDA  )

5%

10%

15%

Foreign Stocks

Cemex (NYSE: CX  ) ; GlaxoSmithKline (NYSE: GSK  ) ; Petrobras (NYSE: PBR  )

5%

5%

10%

Bonds

Vanguard Long-Term Bond ETF (BLV)

60%

40%

20%

REITS

Vanguard REIT ETF (VNQ)

10%

10%

5%

According to these profiles, large-cap stocks, which tend to be less volatile, should make up the bulk of your stock allocation. (As we've learned from the past year, though, "tend to be" is not the same as "are always.")

Small-cap stocks (companies with a market cap of less than $2 billion) offer higher potential returns, but they are a bit riskier and so should make up a smaller percentage of your portfolio. International stocks can often help to limit your exposure to the U.S. economy. Exposure to REITs provides you with an asset that is not highly correlated with the stock market. Bonds, being a lower-risk investment vehicle, should make up an increasing percentage of your portfolio as you near retirement.

4. Cashing out too early. Dipping into your retirement savings might seem like a viable short-term solution if you're in a pinch, but there are so many reasons why you should avoid doing so if at all possible. First of all, you're undoing the magic of compounding interest. As mentioned, starting over can set you back years. Secondly, if you're withdrawing from a 401(k) or IRA, you'll face an automatic 10% tax penalty. So unless you're facing an emergency (medical or otherwise) cashing out is a costly mistake.

The Foolish bottom line
Avoid these four costly mistakes and you'll considerably increase your chance of a comfortable retirement. Remember to plan early, save a sufficient amount, invest wisely, and if you have a choice, never cash out your 401(k) or IRA ... until you're drawing it down in your golden years, that is.

Steering clear of the pitfalls of financial planning and staying disciplined can be difficult, especially when you're constantly faced with decisions. Robert and the Rule Your Retirement team aim to help the average investor with just such decisions. You can try the service free of charge for 30 days -- without obligation to buy a thing. You'll have full access to all back issues, as well as retirement planning calculators, model portfolios, and advice for surviving in today's economic climate.

Click here to give it a try.

Claire Stephanic does not own any of the companies mentioned. Petrobras and GlaxoSmithKline are Income Investor recommendations. Google is a Rule Breakers recommendation. Chipotle is both a Rule Breakers and Motley Fool Hidden Gems pick. Cemex is both a Global Gains and Stock Advisor selection. The Fool owns shares of Chipotle and Cemex. The Fool has a disclosure policy.


Read/Post Comments (22) | Recommend This Article (64)

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 March 07, 2009, at 11:43 AM, sgeno wrote:

    This is a tough read for someone not in the "investor class." My husband & I lost everything in a Chapter 7 bankruptcy in 2002 when our high-tech, high-paying manufacturing jobs went overseas. We now have no savings and live in terror that each paycheck will not cover our expenses. I had an accident in June that required 2 surgeries and now we are facing another bankruptcy for the medical expenses.

    I'm sure all of this article is very good advice, but some of us out here are facing retirement in declining health and poverty - with no rescue in sight. It's a bitter reality for people like us.

  • Report this Comment On March 08, 2009, at 9:04 AM, romefo wrote:

    i never had a high paying job anywhere, but when i was 30 someone said you had better put 15% per month back and not use credit cards. that's what we have done for 30 years. while our portfolio is down, we are not out. we have two years to pay on our modest home. then i look at people who spent more and bought more and many of them will now have the government help them on their mortgages and bills and i wonder if there was any advantage to playing by the rules or not? as we see our savings shrink i wonder if we should have lived higher on the hog? what ever happened to personal responsibility? why did so many 60 year olds not see this coming?

  • Report this Comment On March 08, 2009, at 9:06 AM, romefo wrote:

    i forgot to mention, i lost my job in 1998 because of my health. my wife started sewing for people and now we have a drapery business. you gotta do what you gotta do to survive.

  • Report this Comment On March 09, 2009, at 3:17 AM, cgaakks wrote:

    Why do you think so many 60 years old did not see it coming. I am very educated but earned very little as a teacher in a private school.Private schools pay a third of what a public school teacher makes. I grew my own food, wore second hand clothing, drove a ten year old car , bartered, had odd jobs in addition to my fulltime one. I only bought basic food items ...staples. I never failed to pay the maximum in my IRA. It was a sacrifice. I was looking forward to some leisure money in retirement whenever that may be. My retirement has sunk wiht the market. I hear so many different opinions: buy and hold; short it. I do not know who to believe. I jsut pray the downward spiral would stop so we can recover. I also hav eno health insurance...cannot afford it. I would have to take out a nongroup policy. I do whatever I can do to earn money. I live in a small town that is folding up: no jobs.

  • Report this Comment On March 09, 2009, at 6:54 PM, BenHadd wrote:

    The fifth way to ruin your retirement is to follow the advice consistently provided here:" Buy and HOLD for the long term." Don't sell, just ride that market down like Slim Pickens riding the bomb in Dr. Stangelove.

  • Report this Comment On March 09, 2009, at 10:46 PM, steveherb wrote:

    THE FOUR MISTAKES

    1. PLAN TO LATE

    In my twenties I had to pay, used car loans with hiogh interest rates, rent, fraudulant school loan, 1st dui and MADD slammed the fines.

    2. DON'T SAVE ENOUGH

    92 there was a recession. Remember

    3.DON'T INVEST WISLEY

    I put $5,000 with Chales Schwab in 2000. I have JP Morgan and had Ford ( thank god I got rid of them). My total now is $5,400 minus $10,000 over the years.

    4. CASHING OUT EARLY

    Hah! I'm cashing out by default. Put my savings into a home with stated income and an option arm recommended by my lender. Yes. call me stupid. I did'nt know.

    Yeah. Surving the past two decades has been a real pleasure. So if I invested $300 dollars twenty years ago it would probably be worth $150 today if not stolen along the way

  • Report this Comment On March 09, 2009, at 11:32 PM, ReillyDiefenbach wrote:

    "Slim Pickens riding the bomb in Dr. Stangelove."

    LOL!

    A very apt simile for the buy and hold crowd.

  • Report this Comment On March 10, 2009, at 9:09 AM, plawson382 wrote:

    Rule 1 Always spend more than you make.

    Rule 2 Always impress your friends with things they can't afford.

    Rule 3 Always plan on the Government to bail you out

  • Report this Comment On March 10, 2009, at 11:29 AM, bkill wrote:

    Starting early, very early, is the best thing anyone can do. By the time I was 10, my father (whom I hated for this) "stole" half of every $ I got for birthdays, holidays, etc. He then purchased ONE share of Campbell Soup for me and started a DRP. Then it was one share of the local electric company. Then one share of ... you get the picture. All things I could see, touch and understand. My detested father also "forced" me to save at least 10% of my income (paper route, cutting grass) annually, live below my means, eschew credit cards, etc., as I got older. By my mid-20s, this was all such a habit that I did it automatically. "It" being paying myself first. Now, 50 years later, while I'm down 50% like everyone else; I still have a nest egg and in hindsight, my frugal house, 11-year-old car and other telltale signs of "poverty" look a lot better than the leased BMWs and McMansions my peers are saddled with. It may be too late for many of us to salvage much of our retirements, but it's a perfect time to start our children or grandchildren on the road to long-term security. Follow my old man's lead and get the youngsters involved in finances NOW. Keep it simple so they understand it. They may not like it, but who's the adult? And boy, when they finally see the light, you'll go from "Most Hated Relative" to most beloved. (They might even be able to support you in your dottage, too, LOL!!!)

  • Report this Comment On March 10, 2009, at 12:06 PM, Tusk87 wrote:

    I'm in my late 50's, have saved all my life, contributed to my 401K plans to the max and now am faced with losses of over $250,000. I cannot see a way to recover during my lifetime. I played by the rules. Paid my bills on time, bought down my mortgage, and lived within my means. Now, I face the potential loss of my paid for home, not enough income to pay my bills, and am hearing that it may be 2 decades before my stocks come close to breaking even. I suspect that retirement will never come. All that is needed is a health crisis, or a major home expenses and I will be living under a bridge somewhere in a tent. 30 years ago when I started to plan for retirement I envisioned a 401K worth over $300K, ample savings, and a stock portfolio that would allow me to pass on to my family a comfortable nest egg.

    Now I watch as the Wall Street Thugs stole my future.... Nothing is safe!

  • Report this Comment On March 10, 2009, at 2:26 PM, clarknotkent wrote:

    My sympathies to fellow fools who played by the rules and such. Late 50's myself and seeing things crashing is frightening.

    But taking the bear by the ...(what do you grab a bear by?), my wife and I talked about what Plan B could be if either of us lost job. We discovered we didn't know the right details - how much are we spending and for what? I'd tried Quicken before and it was way too much work in details.

    So now I put together a spreadsheet with a worksheet for each credit card, one for checking account, one for paychecks (to capture saving via 401K and med insurance). Overview worksheet captures the amounts in about 10 categories (groceries, home maintenance, dining out, gas, charitables, savings, etc) based on average daily expenses. This give picture of how much "living" costs - useful for that question "how much will you spend in retirement" and how much is going to savings.

    This doesn't replace the losses, but does give a feeling of control and allows for discussions of Plan B, Plan C, etc.

  • Report this Comment On March 13, 2009, at 12:23 PM, BrentLB wrote:

    One thing that this article does not address, though it is always a first principle, is that you should gradually should move more and more of your retirement funds into cash or cash equivalents as you get older, thus gradually decreasing your risk as you get nearer to retirement. During good years this will hurt the final amount you are able to save, but it will also preserve completely at least that portion of your portfolio. And by cash equivalents, I mean either FDIC-insured accounts like CDs, or preferrably treasury bills and/or bonds. The latter ones are historically very good investments anyway and also are one of the few things that go up in value during extreme financial times. Also, putting a small percentage of the cash portion in real estate and gold helps to protect against extreme inflation, as these two tend to far exceed inflation rates during those times.

    The general rule that I have seen is to subtract your current age from 110, the answer being the percentage that should be in cash equivalents. So I, being 45, currently have 35% of my portfolio invested that way.

    So, then with the other 65%, I invest according to an asset-allocation model like the one above. If it is well-diversified, it is a quite rare time that all parts of it will go down like now, and almost never will the entire portfolio drop drastically, only portions of it.

  • Report this Comment On March 13, 2009, at 5:45 PM, molliemd wrote:

    Is the conservative portfolio for those of us who are already retired and who have five more years to go?

  • Report this Comment On March 13, 2009, at 7:49 PM, PaintItBlue wrote:

    WHAT retirement?

  • Report this Comment On March 13, 2009, at 10:32 PM, StillBlessed wrote:

    Very Sorry to read these Post. Glad to see those that are willing to share their individual wisdom. (However, No human escapes this world unharmed.) I am a college graduate, (BS Geology) and over the span of those eight years I attended college fulltime / partime and worked fulltime. No hand - outs. I have met many good & devilish poeple (both genders) in business, have Partner with JP Morgan's Son-In-Law (was a very good man); I am still friends with Nelson Bunker Hunt's son Houston Hunt (Best Man in my first marriage). Where I am going is this, I have had two homes foreclosed, third will be in 2009, I have fought hundreds of battles, and still "Pull" myself up. More important is the loss of the human kind, having lost three wifes and two children along the way. Currently, I have again lost $, but one never truly owns anything. Money does solve problems, but creates far more. I have seen what greed & for the love of money does. I have lost Millions, and have gave assistance to others for them to make Millions. So much more, but my past has given me some wisdom. I truly enjoy life, even when it is (or others may not think) at it's most trying. I wll end with the most important word to those that truly understand.

    " Sorry "

    If one contuines to feel sorry for themselves then you will truly not ever be a success in what you believe. It will only "Pull You Down".

    I pray that I have not insulted anyone, or labored this portion of my insight. It is only written to help.

    Good Luck to All !!!!

  • Report this Comment On March 14, 2009, at 10:29 AM, WishToRetire wrote:

    How about this one:

    5. Understand Inflation

    I need to understand what inflation may do to my cost of living in retirement over the next several decades. Is there anyone who knows more about what to assume than I do. For example you could say "Assume over the long term the cost of living will rise by 3% each year". If so then it's easy to get out a spreadsheet and you'll see how much more you'll need. The numbers get quite hugh in the later years. So when I show this to my financial advisor he says "Don't worry it won't be that high". He has no article or study or book to show me that says this too. So I'm not going to just trust him because he says this (especially after all the losses I've suffered listening to him up to this point).

  • Report this Comment On March 14, 2009, at 10:50 AM, Sema7 wrote:

    This advice is what we have been hearing for years. It may have made sense back in the days when investments actually made money, but it no longer really applies. Many of us invested wisely and conservatively for years and now have little left in retirement.

    I just thank Heavens I have an actual pension (I was offered a chance to change that to an employer-matched 401K account, and thankfully didn't take it). The pension will be less valuable as inflation takes place, but at least it hasn't lost 50% of its value over the last year, and is insured. Employers don't like it, but to really protect employees in retirement, we need to go back to the old defined-benefit pension system.

  • Report this Comment On March 14, 2009, at 2:19 PM, plouf wrote:

    So where is the honest financial planner out there that we can trust?

    I read M. Fool in hopes of finding one of these savvy investors that can help me in this area, but, they seem to be too honest to be financial planners.

    All of the presidents and vice presidents of Morgan Stanley, financial planners with dopey decisions at Schwab, nobody is accountable - they have not helped, only hurt my finances.

    Best financial decisions:

    1. Buying IBonds in 2000 and leaving them alone. May not be the highest interest at all times, but then again, I haven't lost anything with them.

    2. Going back to school to get my masters. Retirement? No such thing.

    Worst financial decision:

    Investing in the stock market and in mutual funds. If I had let my money sit in a bank account accruing it's small interest, life would be much better. But, now I am stuck. Can't withdraw with everything down 50%, except to pay for my masters..

  • Report this Comment On March 15, 2009, at 5:02 PM, emarlow wrote:

    Someone mentioned pensions being "safe". Really? I sure have seen a lot of financial news about big pension funds going broke and leaving the hard-working employee with next-to-nothing after putting in 30 years at a "safe" company.

    Diversification in asset classes AND instruments plus multiple streams of income really seem to be the best way to protect ourselves.

  • Report this Comment On March 15, 2009, at 5:39 PM, AnnieJ100 wrote:

    It's a little scary to read these posts; scary to hear how betrayed those of us who played by the rules feel. Frankly I don't think much is "safe" right now. I think my financial advisors were honest, but they, too, believed what they were told and they have also lost.

    My husband and I have taken 90% of our money out of the stock market. We are now looking at real estate opportunities, small ones with no partners. We are building an energy efficient house, using cash and have no debt. We have a bunker mentality right now, but hope that we can venture out again in a year or so. We're much poorer, without a reliable income stream, but better off than most because we've saved and not gotten into debt. In the long run, playing by the rules has helped us and we intend to continue on that paty. I hope you fools are doing as well.

  • Report this Comment On March 15, 2009, at 8:14 PM, jaaboo wrote:

    The subscription rates for the Fool may or may not be money well spent but the Comments are worth every penny. And don't give up or become disheartened Ladies & Gentlemen. Remember 1000's of small businesses created this economy and will continue to fuel it.

  • Report this Comment On March 22, 2009, at 9:27 PM, 122240 wrote:

    Sometimes you have to go with your gut feeling. Brokers are paid to keep you in the market and are trained to keep you from panic selling. During the tech bubble-burst, my adviser from AGEdwards kept me from selling, and I lost a quarter of a million dollars because I listened to him. Finally, I pulled out from his company, and went with Schwab. Things improved for me, and I was doing well. Then, at the end of last year, my adviser wanted me to sell several holdings and rebalance my portfolio. I sold many, and was reluctant to buy back in (I'm probably 1/3 invested now) the rest in cash or money markets, very low interest. I have not suffered as much a loss as many people. This is my money, and I'll do what I want with it. I learned my lesson the first time. My advisor said I made them look bad because I am paying for advice but not taking it. They dropped me from the Schwab private client program . I paid them all year for advice, but it's my choice whether or not I want do do what they recommend. Now, I don't know what to do next. I keep hearing it will get worse before it gets better. I will tiptoe back in, and ladder some bonds I guess.

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