Road to Ruin No. 1: Trust Uncle Sam.
If you want to be certain you'll spend your golden years dining on Ramen noodles and white bread, put your faith in Social Security. Sure, studies show that the institution can meet its obligations in full through 2042 (or 2052, according to the Congressional Budget Office). But that's still not good enough.
Putnam Investments recently conducted a study of median income levels among retirees. Of the $34,000 your average retiree collects every year, Social Security provides just 41% -- $13,940. (Pensions and other defined-benefit plans add some more, but even with their help, "retirees" find they need to work part-time to scrape by.)
The Foolish solution: Remember that Social Security can supplement your income, but it won't pay for your retirement in and of itself -- you need to do your part.
Road to Ruin No. 2: Spend too much, save too little.
Curious how the other 59% breaks down? It goes like this -- 24% comes from defined-benefit pension plans, and 24% more from part-time jobs. And here's the kicker: The average American can fund only 11% of retirement needs from personal savings. Of course, with our national savings rate hovering around 0%, that should come as no surprise.
The Foolish solution: Spend less, save more. If you can up your savings by just $84 per month ($1,000 a year) and grow that nest egg at the stock market's average historical rate of 10.5% per annum, in 20 years' time you'll have $45,285 to supplement your Social Security income. And that's factoring in an inflation rate of 3%.
Road to Ruin No. 3: Buy high, sell low.
Of course, that 10.5% is just the average return on stocks. If you try really hard, you can find a way to underperform it. The best way to ruin your portfolio's performance: Buy hot stocks and mutual funds. Then, when they crash -- as they inevitably do -- sell in a panic. According to Standard & Poor's, a top-25% mutual fund has only one chance in 10 of remaining a top-25% mutual fund for more than one year running. "Chasing performance" in one year is almost certain to cost you in subsequent years.
It works the same way with popular stocks. Think back to 2000 for a moment. What were the popular stocks at the turn of the millennium, and where are they today?
| Company | Return since Dec. 31, 1999 |
|---|---|
|
EMC (NYSE:EMC) |
-77% |
|
Nortel Networks (NYSE:NT) |
-96% |
|
Qwest Communications (NYSE:Q) |
-81% |
|
Solectron (NYSE:SLR) |
-93% |
And what were the, umm, unpopular ones way back on the millennium's cusp? And where are they now?
| Company | Return since Dec. 31, 1999 |
|---|---|
|
Baker Hughes (NYSE:BHI) |
248% |
|
Caterpillar (NYSE:CAT) |
243% |
|
Toll Brothers (NYSE:TOL) |
550% |
The Foolish solution: Avoid the crowds that gather around "hot" tech stocks. Buy undervalued companies, even -- or especially -- when they operate in boring industries. Oil, bulldozers, and homebuilding may not be the most exciting industries, but that doesn't mean they can't make you rich.
Road to Ruin No. 4: Procrastinate.
According to the Employee Benefit Research Institute's 2005 Retirement Confidence Survey, fewer than half of all Americans age 55 and older have even $45,000 saved up for retirement. In fact, excluding home equity, the median net worth of retirement-age Americans is closer to $30,000 -- which explains why their savings suffice to fund only 11% of their living costs.
You, too, can join this unlucky crowd and share their fate. All you have to do is keep putting off your saving plan until tomorrow. Tomorrow will come soon enough, of course -- and by then, you may have second thoughts.
The Foolish solution: Act now to change your fate. Start investing earlier, and save more. If you can save twice the $84 mentioned above, and start just five years earlier, that $168 invested monthly over 25 years will more than triple your nest egg, giving you more than $142,319 by retirement (again, in today's dollars).
Think you'll need more than that, but not sure how to get what you need? We've got a handy tool on the Rule Your Retirement website that can work the numbers for you automatically and help you figure out how to reach your goals -- just one of many free "extras" that come with a subscription to Rule Your Retirement. Speaking of "free," you can tour the site and try the newsletter entirely on our dime. To learn how, click here.
This article was originally published on Feb. 1, 2006. It has been updated.
Fool contributor Rich Smith has no position in any company mentioned in this article. The Motley Fool is investors writing for investors .
