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The 5 Biggest Retirement Account Mistakes

Lesson 7 from: FAST CLASS: Start Late, Finish Rich

David Bach

The 5 Biggest Retirement Account Mistakes

Lesson 7 from: FAST CLASS: Start Late, Finish Rich

David Bach

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Lesson Info

7. The 5 Biggest Retirement Account Mistakes

Lesson Info

The 5 Biggest Retirement Account Mistakes

So let's go. The biggest retirement mistakes. I see people make, um, here, common retirement mistakes. Too many IRA accounts. So I see this all the time where people have 23456789 10 IRA accounts. How does that happen? First of all, people change jobs. They leave their 41 K plans behind. So it's very calm today to see somebody who's 40 or 50. They've opened up a few IRA accounts. They've got a couple of 41 K plans they've really lost track of. I personally think that the moment you leave a company, if you have a 41 K plan, hopefully all of you will. And you will, too. Of your working in a company, you will take the money with you. Okay, you do. It's called an IRA rollover, and you move the money into a self directed IRA account. If you're Vanguard with your 41 K plan, Vanguard can move the money for you to an IRA account. You could ultimately consolidate your IRAs and manage your money much more effectively when you when it's not splatter all over the place. Um, lazy dollar syndrome hi...

gh. See people with IRA accounts where the money is sitting in cash all the time. I see people where they've got accounts in the money sitting in a 1% CD, underestimating the power of compound interest. I'm going to show you this right now. So this is the most important chart ever saw. When I was younger, it changed my life. There's $100, if you had $100,000 investment and you invested at 1%. Here's what that money grew to recruit. A 110, in 10 years in 30 years, that $100,000 at 1% crude A 134,000. Now let's go look at 4% have 4% $100,000 in 10 years. Grew to 148, in 30 years ago to 324, had a percent $100,000 day percent in 10 years. Doubles. That's a really good number to think about. I always ask myself how long it's gonna take me double my money and it's roughly 10 years at 8%. But what happens if I get the higher rate of return. I'm sorry I said that wrong if I met 1%. My money is doubling in 30 years. But if I go to 8% Look at this. In 30 years, my money's gone up tenfold. You look at your IRA account the difference in your retirement. Like if you were gonna look at these thistles like door number A door number be indoor number C. Which of these would you want? You want this? You want the higher rate of return over here because the math is just astronomically different. So how are we going to get those higher? Elway? Let me show you this. If I take this out even further. Look at this in 40 years, this is the part with compound interest where it's sort of hard to comprehend. Like in 40 years. I went with just one more decade. I went from 10 times my money 20 times my money. If I put $100,000 at 8% in 40 years, I'm a $2,172,000. If I had the money sitting in a CD or cash, I've got $148,000. I didn't even keep up with inflation. So I got to get the money to grow. And I get the money, girl, ideally much more than one or 4%. So what is the biggest mistake investors make? Well, the biggest mistake investors make often with their money is they try to time the market. So here is a the S and P and this is showing you the annual rate of return from 1980 to 2015. Um, that's a long stretch, right? Full period, annualized return. 12.5%. But people get in the market and then they get out of the market because things happen and we get scared. And so we markets go down A lot of times, investors panic and sell. If you missed the top 20 days in the market, your return now is 7.2%. What if you missed the 40 biggest days? 3.7%? What if you missed 50 biggest days? We would be super unlucky. By the way like that, the likelihood that you would actually Mrs 50 days pretty pretty unlikely. But here's the truth about average investors. Average investors air not only in 12.5% of money they're earning about half of that, sometimes about 1/3 of this and that is because people, on average, do not stay with markets. This is a chart showing you with the markets have done going all the way back to 1925. This is is taking $1000 in 1926 $1000 invested in. Let's just go through all the math here. Let's go to the very top. I invested $1000 in what's called the small stock index. $1000 has grown to 27 $1,000,000. What's the annualized rate of return for that? 11.98%? Call it 12% now. Here's the truth. Most people don't invest all their money in small company stocks, so it looks supercool to show you on a chart. But that is not where most people put the stock market money. You shouldn't either. They put a little bit there. Most people if they're in the stock market there. In a large company stock index, this represents the S and P 500 $1000 from 1926 to 2016 grew to $5,597,000. That is an annualized return of 10%. How many of you could live with 10% right? And people go, you can't make 10% of market. I don't know how I look at the charts. I mean, it all depends of you. Invest consistently and leave alone. What other things we have you here we have government bonds, $1000 in government coupons, crude $98,000. That's a rate of return of 5%. By the way. Five percents. Not bad either. Right? Somehow, maybe you'll be happy with 5%. What a greedy audience like. Would you be happy with 5% of home? Really The key to building wealth and it's the hardest que to remember Is this its decades, not days. People who sell you investment advice want you to think it's all about the next six months. Next months. It's decades. Somebody, you're going help. It's like getting upset like you're gonna live 50 more years. You may not wanna work 40 or 54 years, but we're gonna live a lot longer, and we're also really a lot healthier

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