One of the most unfortunate and expensive mistake anyone can
make in planning for their retirement is focusing exclusively on savings. Iíd
understand if you were a bit perplexed about my rigid insistence on this,
because it runs completely counter to most financial advisorsí advice: ďAll you
have to do is save, save, save!Ē
Let me direct your attention to an interesting dilemma: Wouldnít
you agree that almost everyone saves money
toward retirement? Thatís what American workers are trained to do. Yet somehow,
only a tiny percentage are able to achieve a comfortable retirement Ė
financially speaking Ė which means that the majority miss the mark, some quite
significantly. While various reasons may account for this, my years as
eyewitnesses into peopleís retirement planning indicate that saving too little money is NOT one of
Most future retirees miss the boat because they focus on saving
money without worrying about WHERE they
save it. Think about it this way: If the container into which you are saving
has a leak, most of your savings will eventually drain out. Meanwhile, someone
else who puts their savings into a leak-proof container will keep all their
money and likely end up with much more than you, in spite of the fact that you
might have ďsavedĒ a lot more money.
Let me use a hypothetical scenario to prove this point. Assume
it is January 1, 2007, and your investment account has a balance of $100,000.
Letís also say youíre using a traditional investment vehicle, whereby you can
make unlimited gains or losses. For this scenario, weíll put your investment in
the S&P 500 Index. Letís call this Strategy X.
Here are the results of your hypothetical investment over the
past five years:
- The beginning $100,000 gained
3.53%, growing to $103,530 in 2007.
- Then it lost 38.5% and ended 2008
with a balance of $63, 671.
- Then it gained 23.5% and rose to
$78,634 in 2009.
- It again rose in 2010 by 12.8% to end
- Then in 2011 it remained flat at
0% to end at $88,699.
Now letís turn our attention to a little-known approach we will
call Strategy Y. Under this strategy, instead of putting your money directly
into the stock market, we will link it
to the growth in the same S&P 500 index in which Strategy X invested.
However, we are going to cap your gains at 10%; but
you will be guaranteed a minimum interest of 0%, so when the S&P
500 plunges, you wonít lose anything. To prove my point beyond all doubt, Iím
going to fund Strategy Y with $80,000, a full $20,000 (or 20%) less than the
$100,000 with which Strategy X started!
Now pay very close attention to the mathematical breakdown of this
∑ In 2007, you gained 3.53%, increasing to $82,824.
- In 2008, since the S&P 500
lost money, you earned 0%, but kept your $82,824 balance, unharmed.
- In 2009, your gain was capped at
10% (although the index earned 23.5%), leaving you with an ending balance
- You gained another 10% in 2010
(out of the indexís 12.8% actual gain) and ended the year with $100,216.
- In 2011, your balance will hold
steady at $100,216 (since the index returned 0%).
There may be some who
will try to argue that my analogy focused only on the most recent five years (January
2007 through December 2011), and should have covered a much longer time period.
The problem with that argument is that it fails to recognize the fact that it
takes only ONE dip to ruin everything, when it comes to investing. You see,
whenever your investment loses money, it is your entire balance (made up of all your contributions and gains up
until that point) that suffers, isnít that true?
So WHERE is your nest egg saved? Is the container
thatís holding your life savings reliable? Please donít take a chance with your
retirement because itís one loss you donít want to endure. We invite you to schedule a personal,
private, complimentary, and no-obligation consultation with one of our
experienced, licensed professionals to find out what you can begin doing today
to fix any leaks in your retirement fund container.