Your retirement party is in full swing when your financial advisor hands you a printout with a breakdown of your monthly retirement income. Several years ago she had prepared a retirement plan telling you exactly what needed to be done in order to meet your retirement income goal. You have been faithful to the plan and are excited to see the fruits of your labor. In utter disbelief you ask, “How did I come up so short?”
Here are 5 reasons your retirement account will come up short.
Market Volatility. You know the market goes up and down but you don’t realize how devastating market volatility can be. If the stock market dropped 50% this year and gained 50% next year, I imagine the Wall Street headlines might read “Shew! We dodged a bullet. Market Flat”. Do the math. -50+50 = 0 divided by 2 years is an average of 0%. Technically they could advertise a 0% return or flat market. Now, imagine you had $100 invested in this so-called “flat” market. After year one, your $100 would be worth $50. In year two, your $50 would gain 50% or $25 bringing your account back to even. Right? That would be really nice but you only have $75, leaving your account DOWN 25%!
Fees. No-load funds are NOT free. Nothing is free! Ask yourself how you found out about this free mutual fund. Oh, you saw it in a magazine? And who do you suppose paid for the ad? Fidelity? Try again. The investor paid for that ad. Fees are often hidden yet very real. And remember, they come out whether you make money or lose money. If your 401(k) loses 4% in a given year, it could easily drop another 2% due to fees increasing your lose by 50% for the year. Yikes!
Faulty Retirement Projections. Your retirement projection is not worth the paper it is written on. The future value of $1,000 compounded at 8% is $1,469.33.
Year 1 $1,000 $80 (8%) = $1,080
Year 2 $1,080 $86.40 (8%) = $1,166.40
Year 3 $1,166.40 $93.31 (8%) = $1,259.71
Year 4 $1,259.71 $100.78 (8%) = $1,360.49
Year 5 $1,360.49 $108.84 (8%) =
Yet the value of $1,000 invested in a product that averaged 8% is $1,290.15
(10 + (-32) + 40 + 12 + 10 = 40 / 5 years = 8%)
Year 1 $1,000 + $100 (10%) = $1,100
Year 2 $1,100 - $352 (-32%) = $748
Year 3 $748 + $299.20 (+40%) = $1,047.20
Year 4 $1,047.20 + $125.66 (+12%) = $1,172.86
Year 5 $1,172.86 + $117.29 (+10%) = $1,290.15
290.15/1000 x 100 = 29.015/5 = 5.80% NOT 8% - Your account is short 17.92%
FACT: You cannot accurately predict a future value when there are periodic loses.
Tax-Deferral. Deferring income tax does not solve your tax problems. Every time you make a contribution to a tax-deferred account you are attaching a blank check signed by you and payable to the IRS? It’s true! By contributing to a tax-deferred account, you are authorizing the IRS to charge whatever tax rate they want to charge on that money when it is withdrawn. What’s worse is that there is a blank check attached to every dollar your dollar earns inside of a tax-deferred account! If you think your taxes will be lower in retirement, think again. With our deficit quickly approaching 20 trillion dollars, taxes are not going down!
Inflation. The long-term average for inflation in the United States is 3.33%. Did your financial advisor factor 3% inflation into your retirement projection? No. It’s hard to believe a gallon of gas doubled 2.92 times over 50 years, but it did! Gas was .32 cents per gallon in 1966. Today it is selling for over $2.45 per gallon. Inflation is a serious threat to your retirement income.
You only get one retirement. There are no do-overs. Go to JondaKnows.com to schedule a financial review today.