4 Ways to Ruin Your Retirement

Want to retire in poverty and live a life of penury?

Here are four good ways to get started -- and one great solution for those who choose to become wealthy instead.

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, there's no better way to go about it than by putting your faith in Social Security.

Sure, studies show that the institution can meet its obligations in full through 2037. But that's still not good enough.

According to the Employee Benefit Research Institute, the average U.S. retiree survives on just more than $29,200 a year. Social Security provides less than 39% of this sum -- $11,277. Pensions and other defined benefits plans add some more, but even with their help, most "retirees" find they need to keep working 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 as to how the other 61% breaks down? It goes like this: 19% comes from defined benefits plans such as pensions, 25% more from part-time jobs. And here's the kicker: The average American can only fund 16% of retirement needs from personal savings.

The Foolish solution: Spend less, save more. If you can tuck away as little as $1,000 a year (that's just $84 per month), 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 not $20,000, but $45,285 to supplement your Social Security income. And that's post-inflation, in 2009 dollars.

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. And then, when they crash -- as they inevitably do -- sell in 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. So "chasing performance" in one year is almost certain to cost you in years subsequent.

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?

All prices adjusted for dividends and stock splits. Data provided by Yahoo! Finance.

And what did we hate back then on the millennium's cusp? And where are they now?

All prices adjusted for dividends and stock splits. Data provided by Yahoo! Finance.

The Foolish solution: Avoid the crowds that gather around "hot" stocks with questionable profits. Buy undervalued companies, even -- or especially -- when they operate in boring industries.

Refining, steel, and tobacco 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 EBRI's 2009 Retirement Confidence Survey, half of all Americans of age 55 or older have less than $50,000 saved up for retirement. Set aside home equity (for those of us who still have any), and more than one in three soon-to-be-retirees has less than $25,000 tucked away. That's why our savings suffice to fund only 16% of living costs.

You, too, can join this unlucky crowd, and share their fate. Don't start today what you can put off to tomorrow, and before you know it, tomorrow will be here and it will be too late.

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, then $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. And speaking of "free," you can take a free tour of the site today, and give the newsletter a tryout entirely on our dime. To learn how, click here.

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This article is based on an earlier version also titled "4 Ways to Ruin Your Retirement." It has been revised and updated.

Fool contributor Rich Smith has no position in any company mentioned in this article. The Motley Fool is investors writing for investors.