Going broke in retirement is the top fear of most Americans.
So instead of suggesting what not to do, I thought I would give you 5 sure ways of increasing the probability of going broke in retirement and some tips on how to avoid them.
Here we go …
# 1 – Spend more than you earn
This, more than any other reason has been the largest downfall to many financial plans. And it does not matter how much money you have or how much you make.
It is simple math … Money coming in must be less than the money going out !!
I have seen people with incomes of $ 200,000 and a 401k balance of $ 1,500,000 struggle through retirement. Even though $ 1.5 million sounds like a lot of money, which it is, it is still not enough to support a $ 200,000 annual income.
If you divide $ 1.5 million by $ 200,000 you'll get 13.33%. This means this person would have to earn 13.33% consistently to support his lifestyle, which is unrealistic. And let's just say he earns a more realistic 6% per year, then his money would only last 10 years.
So, the solution is to spend less than you earn and save money towards your retirement in a company 401 (k) or an an IRA.
# 2 – Do not invest in 401k or IRA for Retirement
You worked hard to get where you are at!
You take company calls at all hours of the night, you put up with the company boss, you often handle company problems on your time, so you say to yourself, “I deserve to enjoy life an just do not any extra money to put into a 401 (k) “.
Beside, you'll have plenty of time to save … Right!
Procrastination ranks right up there with spending too much. Even if you start small and increase contributions as you go, is better than not starting at all or starting too late.
Here is thought … Do not change your lifestyle, simply put half of your next pay raise into your company 401 (k) or your own IRA and continue to do this each time you know it, you 'll be at the maximum contribution.
# 3 – The Government will take care of me
Why save anything? I have Social Security, that will do, will not it?
There are a whole lot of problems with that statement, but let's just say that social security can be a good foundation for your retirement planning, but if you're planning on having enough money to live comfortably during your retirement you might want to check out this website.
Social Security will typically only replace a small percentage of the average workers income and that is without the concerns of the Social Security going broke.
My advice is if at all possible, plan for Social Security to be a small part of your overall retirement plan.
# 4 – Putting your money on a hot tip
A quick little story … I had a client years ago that called and said she wanted to invest $ 50,000 with a friend who had started a company right here in Lafayette, Louisiana.
I asked if she knew anything about the company and she told me no, not much. But, he was very smart and he was planning on taking the company public and “we can all make a bundle”. (This story takes place during the late 90's, when companies were going public at the highest rate ever and many were bogus and left investors broke.)
She welcomed the paperwork for me to review and after some research I advised her not to invest. This investment was not listed with the state security office and as it turned out later was a scam.
It was a blind pool, which is a legal investment when done right, but even though it is legal it is still a very risky investment. How it works is that they raise money first and then find something to invest in later! Here's the name “blind pool”, you invest blindly and hope it turns out all right.
Well, the problem with this company was not that it was a blind pool it was that they were not registered to offer securities to investors in the state of Louisiana and unfortunately they were able to raise about $ 500,000 of hard earned money from local investors and of course used the money for personal reasons and never invested any of it.
This gentleman made the local papers after the state security department picked him up and denied him of investment fraud for not being registered with the state.
What happened to my client you asked …
I advised her to not invest in any non-registered security much less a blind pool and if she wanted to invest, wait until it goes public and then she can buy it on a public stock exchange.
And guess what, years later she confessed she did not invest the $ 50,000 but cave him $ 10,000 and never saw a penny back.
Please use common sense when investing in anything and preferably stick to investments that are registered with the state you live in or something that can be traded on a public stock exchange.
# 5 – Living to long
This is one we probably do not have much control over …
But if you want to die broke, then make plans for your money repeating till age 80 and then go ahead and live till 90 and BOOM you are now broke!
With medicine and technology today we are just living longer, active, healthier lives.
Back in the 1980's most retirement plans used a life expectancy of 80 to age 85. Today, life expectancy has extended out further and further and now most retirement plans extend out to age 95.
So, do not worry if you've already done # 1, # 2 & # 4, then you better hope for the government to fund # 3 otherwise extend all planning to at least age 95.
All kidding side, most financial plans should plan for a longer active life and should adjust every few years to accommodate the changes in medicine and technology that is helping us all live longer.