Money Matters - Simplified

Don't Blow Your Retirement With One Mistake

I'm not saying the small sacrifices don't matter.


Don't Blow Your Retirement With One MistakeGet original file (7KB)

Yes, as everyone likes to point out, forgoing your daily cup of coffee at Fourbucks will help you save toward a comfortable retirement.

But, too often, the years of monk-like austerity are eliminated with a single bad decision. I'll show you using the latte metric -- that is, how many days of avoiding those $4 pick-me-ups it takes to equal one bowl of bad decision-making.

Example No. 1: Housing
This is the obvious example right now. Conventional wisdom says that buying a house beats renting because you build equity and get tax benefits on your mortgage interest. But as with any investment, price matters.

And prices got detached from underlying value in a major way during the run-up. Those who took on conventional mortgages with monthly payments they could afford can wait out the storm. Unfortunately, those faced with refinancing teaser rates they could barely afford don't have that luxury.

To calculate the cost of a housing mistake, let's assume someone bought a $400,000 house and the house's value dropped 10% (the latest numbers show average housing prices have fallen 14.4% year over year). That's negative equity of $40,000, or 10,000 days of lattes. You'd have to skip that pick-me-up for 27 years to make up for this one. Yikes!

Example No. 2: Stocks
We Fools love stocks. But not taking the time to properly research your options can lead to a lot of lost lattes.

Let's file this example under, "If you can't beat the index, invest in it." We'll compare the results of investing $10,000 a year ago.

What Was $10,000 Is Now

Lost Lattes

S&P 500

$8,891

278

Abercrombie & Fitch (NYSE: ANF)

$8,807

398

Wendy's (NYSE: WEN)

$7,837

541

Starbucks (Nasdaq: SBUX)

$6,441

890

Citigroup (NYSE: C)

$3,948

1,513

Lennar (NYSE: LEN)

$3,882

1,530

Did I cherry-pick some of these to prove my point? Well, yeah. If you bought US Bancorp (NYSE: USB) instead of Citigroup, your loss would have been minimal. If you bought McDonald's (NYSE: MCD) instead of Wendy's, you'd have a gain.

The important takeaway is how much everyday scrimping and saving you have to do to make up for an investing mistake. Taking three months to comparison-shop for a refrigerator and 30 minutes to buy shares in a company is self-defeating. (And it deprives you of many years of caffeine.) The table above also underscores the importance of holding a diversified portfolio -- so that one bad stock won't ruin your retirement. Motley Fool retirement expert Robert Brokamp says a good rule of thumb is to hold no more than 10% of your net worth in a single stock.

If you'd like help avoiding big financial mistakes, Robert and his Rule Your Retirement service can help. It covers a range of retirement topics, from proper portfolio diversification to avoiding tax pitfalls to specific stock and fund recommendations. Click here for a 30-day free trial -- there's no obligation to subscribe.

Copyright © 2008 Universal Press Syndicate.