July 30, 2010

Retirement Killers

Retirement is the number one goal of investors. Yet, looking at the numbers, it's clear that many investors are undermining their good intentions with unfortunate actions.  Here are five mistakes to avoid if you want your retirement dreams to become a reality.

1.  Cracking your nest egg before retirement.  A study by Hewitt Associates found that 45% of workers cash in their 401(k)s when they switch jobs.  In other words, they take the money -- paying income taxes and a 10% penalty if they're not yet 59 1/2 years old -- rather than leave it in a retirement account.  That's no way to build the retirement of your dreams.  When you change jobs, you can transfer the money in your employer-sponsored retirement plan to an IRA.

2.  Spending your retirement savings too fast. If you've made it to retirement, congratulations.  You've amassed enough money to create your own portfolio-generated paycheck.  Excellent work.  But you can't take it too easy, because you'll receive a severe pay cut if you deplete your portfolio too fast.  How much can you take out each year and be almost certain that you won't outlive your savings?  Just 4% a year.  That's the withdrawal rate that would have sustained a mix of stocks and bonds over most 30-year historical periods. Sure, if you retire on the eve of the next bull market, you can take out more.  However, if you quit working right before the next bear market, then taking out more than 4% a year could have your portfolio beating you to the grave.

3.  Trying too hard to beat the market.  You basically have two choices: You can be a master stock-picker like Warren Buffett or Peter Lynch and try to find the next Wal-Mart.  Or you can broadly diversify your assets, mostly via low-cost index funds. This way, you enjoy hefty exposure to all the great companies.

4.  Paying too much for help.  There's nothing wrong with getting financial advice.  But I firmly, strongly, passionately believe that such help should be objective and affordable.  Paying too much for advice (especially if it's bad or at least conflicted) does a lot for your broker's retirement, not yours.  Paying just 1% a year on a $100,000 portfolio over 20 years could result in your forking over more than that amount in fees. That's a hundred grand that could have been in your pocket. Of course, if the advice you received had your portfolio performing better than what you could do on your own, then the price might be worth it.  But if you're paying 1% or 2% a year to lose to an index fund -- as most mutual fund managers do -- then you're better off taking control of your own investments.

5. Retiring permanently when you really just needed a break.  If you're in your 60s, you should plan on living at least another two decades.  Can you stand full-time leisure for 20 years?  Sure, it may sound good now, but many retirees find they get pretty bored after a while.  But by then, they have already severed many of their professional ties.  Before you decide to retire fully and permanently, discuss a phased or gradual retirement with your employer and/or business partners.  Or the possibility of working on a project basis, allowing you to take several months off each year.  Or maybe just a one-year sabbatical. Explore your options before you no longer have them.


  1. Excellent advice. Another possibility is to work part-time, or create an online home-based business, to supplement the investment income. This can provide flexibility to enable travel and other adventures, whilst also providing an interest and purpose for those who are work oriented.
    Jenni Proctor

  2. Retirement is a strange time of life for most people. Suddenly they are faced with time on their hands and no direction, previously provided by their job or business, In addition they have less cash to spend (even the best pensions are usually only 2/3 final salary) and more time to spend it. For some the solution may be investment but for many this is not a practical answer. Starting a new and stress free business that can take as little as 2 hours a day will create new purpose and add income. All it takes is a willingness to follow a step by step daily action plan that I can provide!

  3. Good info. I plan to retire at 55, but the real retirement comes when I become 90+. Spending time with my family is very important, but I love working on projects.