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# How to Avoid Ruining Retirement

I'm a Millionaire!
Not realizing just how much needs to be saved in order to retire is our next mistake. While the 1.6 million in the above example may seem like a lot of money, it won't pay the bills in 40 years. Assuming prices go up by 3% each year, 1.6 million will only have the buying power of a half a million dollars in 40 years when Mr. 25 wants to retire. Assuming Mr. 25 lives to the ripe old age of 90, a 1.6 million dollar account will give him about $2,300 dollars of income each month in real terms. This assumes that he earns 6% on his money after he retires. Does it seem odd that our 1.6 million dollars is now only worth $2,300 dollars per month? Inflation is the culprit. In actuality Mr. 25 will be getting about $9,800 dollars out of his account each month in retirement, but because prices for everything will be so much higher in 40 years it will only be able to buy the same amount that $2,300 dollars buys today. This is what "real terms" means. Mr. 25 will have to determine if $2,300 per month will be enough to live off of in retirement. Most likely it will not be enough unless he really likes ramen noodles.
Do I Get a Checkbook with my 401(k)?
Using Retirement Accounts as income before retirement is becoming a mistake that more and more people are making. This is especially true for those who have employers contribute to their retirement accounts. While it is tempting to assume this is just extra money you can spend, it has terrible long-term effects. Taking as little as $5,000 out of your retirement account at age 30, is like taking out $35,000 in 35 years. If it would have been allowed to stay in the account and grow over 35 years, it would have accumulated to almost $35,000. The other problem is that you will most likely have to pay taxes and a 10% penalty on the money because it is being taken out before age 59 1/2. Now to get $5,000 after the taxes and penalty, you have to take out over $8,000, which would equal over $55,000 lost in 35 years.
I'm Sure my Basket Can Hold All of This
Not Diversifying or putting all your eggs in one basket is another financial blunder. I was a retirement specialist working with 401(k) and 403(b) account owners when the market crashed in 1999 and 2000. How vividly I remember talking with people in their fifties and sixties who in February of 2000 (right before the NASDAQ started falling) wanted to put their entire retirement account into technology. I discussed with them the advantages of diversification especially in such a volatile market. Some listened, but most didn't. The comment I remember the most is, "I don't have enough money to retire so I need it to grow really fast." The result was buying in at an all time high and then either jumping out along the way down or riding the market to the bottom. Those who stayed in for even a year lost more than half of their retirement in a technology fund.
Compare that to those who were diversified across several markets, domestic and international, and several types of investments, equity, fixed-income and short-term. Someone in their fifties, planning on retiring in 10 years would be diversifying if they had about 60% in stocks and the rest in bonds and money markets. This type of portfolio still lost money during that volatile time, but not nearly as much as a technology fund did. Those with a diversified portfolio lost about 5-15% in that same time period that the technology sector lost 50-65%. Trying to earn money for retirement by putting all your eggs in one basket, especially when you are close to retirement, is almost as risky as using the slot machines in Las Vegas. If you are behind in your savings, your best bet is to start contributing the maximum allowed and push back retirement for a few more years.
Won't Uncle Sam Take Care of Me?
Relying solely on Social Security will leave you with little income in retirement. In a message to the public issued by the Social Security and Medicare Board of Trustees in 2005 they stated, "We do not believe the currently projected long run growth rates of Social Security and Medicare are sustainable under current financing." They went on to say that without major changes to Social Security, it will begin to fall short in 2017 and will only be able to fund 74% of benefits by 2041. The suggested solution is to either increase taxes 15% or decrease benefits 13%, neither of which are good for retirement. To continue to live the same lifestyle that you are accustomed to, saving for retirement is essential.

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