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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 remained relatively brutal in '09, and considering the constant chatter about "the second Great Depression," it should surprise 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 more than half of the working population hasn't even attempted to run the numbers! Worse yet, the survey also reports that 46% of workers have a total savings of less than $50,000. And 22% say they have no savings at all.

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

1. Planning too late
Studies have shown that the length of time for which you invest has more of an impact than the amount you save. An investor starting in his or her 30s or 40s has to save significantly more to catch up. According to the U.S. Department of Labor, you'll need to save 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. Not saving enough
It's no secret that we have become a consumerist society, 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

9.0%

1990

$3,840

7.0%

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

2.0%

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. The money is less painful to part with, and you'll never skip a month.

3. Investing unwisely
Asset allocation plays a very important role in retirement planning. The theory is simple: Don't put all of 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 real estate investment trusts (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 allocations for conservative, moderate, and aggressive investors:

Asset Class

Examples

Conservative

Moderate

Aggressive

Large-cap stocks

Pfizer (NYSE: PFE  ) ,
IBM (NYSE: IBM  )

20%

35%

50%

Small-cap stocks

Crocs (Nasdaq: CROX  ) ,
Middleby (Nasdaq: MIDD  )

5%

10%

15%

Foreign stocks

Cadbury (NYSE: CBY  ) ,
Barclays (NYSE: BCS  ) ,
Turkcell (NYSE: TKC  )

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 thus 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. Second, 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.

Already subscribe to Rule Your Retirement? Log in at the top of this page.

This article was originally published March 7, 2009. It has been updated.

Claire Stephanic owns none of the companies mentioned. Middleby is a Motley Fool Hidden Gems recommendation. Cadbury and Pfizer are Inside Value recommendations. Turkcell is a Global Gains recommendation. The Motley Fool owns shares of Middleby. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (9)

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 August 31, 2009, at 5:03 PM, DennisMack wrote:

    When I read the title of the article, I tested myself by trying to guess what the four ways might be. I realized when I read the article that my perspective was different from the writer, who was trying to help people prepare for retirement. I was thinking of the person in retirement. Then I realized that my four ways need work well before retirement.

    Four additional ways that destroy a retirement:

    Have bad health. Much is not covered by Medicare. Healthy living is a form of saving.

    Enter retirement with debts. Money that should go to enjoying retirement will instead pay off former excesses.

    Drawdown too much. You risk running out of money before you check out. The counterpart of this is not having saved enough.

    Lack good relationships. We need to remain open to forming new friendships to challenge our mind and take up new activities. Friends and family can share information about scams, safety tips, bargains and help us when we need some assistance. Isolation will destroy a retirement, leaving us depressed and infirm. Make a new friend. Build the bonds to siblings. Love.

  • Report this Comment On August 31, 2009, at 8:34 PM, brdmartin wrote:

    While a good article, 2 comments on part 1...

    I got done with grad school at 29, and it's kind of concerning to hear that 30 is considered late

    "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."

    Yeah, this sounds like a great idea, but there's no information about how to actually do these calculations. Guess I'll have to make an appointment with the financial consultant someday soon to actually figure this out.

  • Report this Comment On September 01, 2009, at 11:06 AM, IThinkNot wrote:

    The article missed one important point: that many boomers planned their retirements (as far back as when they were in their 20s or 30s) based on promised defined benefit plans that suddenly were eliminated.

    For those in their late 50s on up to age 70 or so, it's too late to save enough to retire on. Guess that means Walmart will have to hire more greeters.

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