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4 Ways to Destroy Your Retirement

http://www.fool.com/retirement/general/2009/04/21/4-ways-to-destroy-your-retirement.aspx

Claire Stephanic
April 21, 2009

In 2008, the stock market had its worst year since 1931.Given that returns have remained brutal in '09, and with 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 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. Plan 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 her 30s or 40s has to save significantly more to catch up. According to the U.S. Department of Labor, you'll need three times more savings 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 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%

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. Invest unwisely
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

Johnson & Johnson (NYSE: JNJ  ) ; Coca-Cola (NYSE: KO  )

20%

35%

50%

Small-cap stocks

Volcom (Nasdaq: VLCM  ) ; Panera (Nasdaq: PNRA  )

5%

10%

15%

Foreign Stocks

Novartis (NYSE: NVS  ) ; BP (NYSE: BP  ) ; Nokia (NYSE: NOK  )

5%

5%

10%

Bonds

Vanguard Long-Term Bond ETF (BLV)

60%

40%

20%

REITS

Vanguard REIT ETF (VNQ)

10%

10%

5%

According to