The 5 Biggest Retirement Account Mistakes
So let's go to the biggest retirement mistakes I see people make. Here are common retirement mistakes. Too many IRA accounts. So I see this all the time, where people have two, three, four, five, six, seven, eight, nine, ten IRA accounts. How does that happen? First of all, people change jobs. They leave their 401(k) plans behind. So it's very common today to see somebody who's 40 or 50, they've opened up a few IRA accounts, they've got a couple 401(k) plans, they've really lost track of it. I personally think that the moment you leave a company; if you have a 401(k) plan, hopefully all of you will and you will too if you're working at a company; you will take the money with you. Okay, you do what's called an IRA rollover, and you move the money into a self-directed IRA account. If you're with Vanguard with your 401(k) plan, Vanguard can move the money for you to an IRA account. You can ultimately consolidate your IRAs and manage your money much more effectively, when it's not splatter...
ed all over the place. Lazy dollar syndrome. I see people with IRA accounts where the money is sitting in cash, all the time. I see people where they've got accounts and their money's sitting in a 1% CD. I discuss this all the time, that when you have an investment account, when you have a 401(k) plan or you have an IRA account. Yousa can draw this much better than I can. The way to think about this is that you have a bucket. Okay, I'll call this bucket your IRA account. And what happens is you're putting this money in here. But then the question becomes, what did you invest the money in? When you go open up an IRA account at a bank or a brokerage firm, you didn't invest in an IRA account. All that is, is a holding account, and inside it's got the investments. People go to banks and they open up a bank IRA and they think, "I have a bank IRA it pays me 3%." No you don't. You have an IRA account, and they put you in a CD. I have people go, "You're out of your mind. "I've had this for 10 years." I go, "Call the bank, ask them what the money's in." I went through this in a class, and a guy came up to me the next class and he said, "The money was in nothing." What have you been earning? He's like, "Nothing." How many years did you earn nothing for? He said, "Four years." "CD came due, they never called me. "I just assumed it was earning something." He hadn't looked at a statement, wasn't paying attention. Putting more money in, thought it was growing. Money did nothing. You think this doesn't happen to lots of people? It happens to people all over the time. So you've gotta go see what your accounts are in. Don't leave the money behind in old 401(k) plans. I don't have a bullet up here, but the fact that I'm telling you not to leave it behind, don't cash it out. So about one out of three people cash their 401(k) plans out when they leave. Single biggest mistake you will ever make. Don't cash it out and take a check. Don't take the check directly. Have it moved from the 401(k) plan directly to the IRA account so you don't pay taxes. If by some chance the company requires you to take a check, you have 60 days to get that money into an IRA account or you will pay taxes on all the money, and you will pay a 10% penalty. So let me go through that math again. You have $10,000 in a 401(k) plan, and you cash it out. By the time you pay taxes and penalties, you're left with $5, and the money stop growing, obviously, so don't do that. Underestimating the power of compound interest. I'm gonna show you this right now. So this is the most important chart I ever saw when I was younger. It changed my life. This is $100,000. If you had a $100,000 investment, and you invested it at 1%, here's what that money grew to. It grew to $110,000 in 10 years. In 30 years that $100,000 at 1% grew to $134,000. Now let's go look at 4%. At 4%, $100,000 in 10 years grew to $148,000. In 30 years it grew to $324, At 8%, $100,000 at 8% in 10 years doubles. That's a really good number to think about. I always ask myself how long is it gonna take me to 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'm at 1%, my money's doubling in 30 years. But if I go to 8%, look at this, in 30 years my money's gone up 10-fold. You look at your IRA account. The difference in your retirement, like if you were gonna look at this was like door number A, door number B, and door number C. Which of these would you want? You want the higher rate of return over here because the math is just astronomically different. So how are we gonna get this higher rate. Oh wait, 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. In 40 years I went with just one more decade, I went from 10 times my money, to 20 times my money. If I put $100,000 at 8%, in 40 years I'm at $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 gotta get the money to grow, and I gotta get the money to grow ideally much more than 1% 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 the S&P 500, and this is showing you the annual rate of return from 1980 to 2015. 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 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 miss the 50 biggest days? Well you'd be super unlucky, by the way. A likelihood that you would actually miss those 50 days, pretty unlikely. But here's the truth about average investors, average investors are not earning 12.5% of their money. They're earning about half of that, sometimes about one third of this. And that is because people on average, do not stay with the markets. They try to time the markets. It doesn't work. Anybody who says they have a system they can sell you, a red light, green light software, here's my newsletter. These things I can tell you when to get out, and when to get in. They don't work. What works is systematically investing, automatically for time. How do I know this? 'Cause I'm so smart, no. I would say it's time in the market, not timing the market that works. This is one of those charts when I was a kid I saw. If you're in the investment world, they always had these things up on your wall. This is a chart showing you what the markets have done going all the way back to 1925. This is taking $1,000 in 1926. $1,000 invested in, let's just go through all the math here. Let's go to the very top. I invest $1,000 in what's called the small stock index. $1,000 has grown to $27 million. 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 super cool to show you on a chart, but that is not where most people put their stock market money. You shouldn't either. They put a little bit there. Most people, if they're in the stock market, they're in the large company stock index. This represents the S&P 500. $1,000 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, oh you can't make 10% in the market. I don't know, look at the charts. It all depends if you invest consistently and leave it alone. What other things do we have here? We have government bonds. $1,000 in government bonds grew to $98,000. That's a rate of return of 5%. By the way, 5% is not bad either right. How many of you would be happy with 5%? What a greedy audience? Would you be happy with 5% at home?
It's true, if you're late you have to get more. But you know what, I'm so glad I just asked this question, because here's the thing, when you're late you should not be going for home runs. Because here's what happens when people are late. They think, "I'm late, I need to be up here "taking all this risk." No you don't. Because what happens is if you're late, is I see people strike out all day long. So at your point in life, you don't need to be taking a risk up here. We'll talk about a blended portfolio here in a second. You need a combination of this, a combination of this. You're gonna end up somewhere in between here. You need to be getting your 6%, or 7%, or 8% or 9%. Don't be taking a lot of risk, because if you take too much risk now you don't have the time to start all over again. So actually, as you get older, even if you're playing catch-up, we're not looking for home runs, we're looking for singles. This just shows you what you need from inflation, by the way. If you got $1,000 in 1926 you need $13,000 today to equal it. The only reason all this matters is actually this stuff costs more. How many of you guys; well actually this is San Francisco maybe nobody drove here in a car. Did anybody drive in a car? Okay. How many of you drove here in a car; I'll do this another way. When I was a kid, my parents' first home cost $27,000. How many of you drove here in a car that cost more than that? You did, you did. Yeah, no joke, most people are driving cars that cost more than the first home I grew up in. And that wasn't that long ago. I always say, the day is gonna come when people and their average cars are gonna be $100,000. People used to laugh at that, but it's gonna happen. So that's what inflation does. Five things that you need to know with a market correction. Be patient. Markets go down and markets go up. I can promise you for a fact, that markets are gonna go down at some point. We've been up for seven and a half years. We're due for a correction. When markets go on sale, the key is don't panic, and realize that now they're on sale. In 2009 when the markets completely tanked, I wrote a book called Start Over, Finish Rich. And it went all across America saying this is the greatest sale of our lifetime. You can buy homes at below replacement cost, and the market was like at 7,000. We're not at 19,800 I think. People are like, oh the markets are never gonna recover. Every time the markets go down, people are like the markets are never gonna recover. Markets always recover, so be patient, don't overthink it, turn off the news, fight your instincts, stay diversified, leave it alone. If you have a financial advisor work with that financial advisor. Really, the key to building wealth, and it's the hardest key to remember is this. It's decades, not days. People who sell you investment advice, want you to think it's all about the next six months, the next 12 months; it's decades. Some of you are going, you're getting all upset, but you're gonna live 40, 50 more years. You may not wanna work 40 or 50 more years, but we're gonna live a lot longer, and we're also really a lot healthier. Most important decisions again, the contributions that you make. I wanna give you a quick example here. This is a real story of two women who came to my office. They were best friends, worked at the same company, same company basically for 30 some odd years. When the 401(k) paperwork; because it used to be paperwork, it wasn't all online, came around Betty signed up and she put 15% into the plan. She went home, her parents said "You need to do this, you can't afford not to." She did it. Lynn put 4% into her plan. They worked at the same company, same type of job, same type of income, three decades long. Betty came into my office, she was able to retire. Lynn came into my office; they came to the same appointment, they just came in separately. Lynn's like, "I know, here's mine, "I didn't do as well as she did. "Can I retire? "Can I take the package?" Because they were being given retirement packages. I'm like no, you've probably gotta work another 10 years. At least five more years. So all based on one decision made 30 years earlier. Most people when they make a decision on their 401(k) plan, they never look at it again. It's a one-time decision that changes the course of your destiny. And the only thing that can get you to change the decision is you quit your job, you leave your job, or someone like me comes along and hits you upside the head 10 different times til Sunday, and you change your mind and do something different.