My wife looked over my shoulder at the title of this article and exclaimed, "Can you be any more negative?" She added, "Why on earth would anyone want to learn how to destroy their hard-earned retirement nest egg?" I am sure that most everyone's reaction is similar. The title begs the question: Isn't it much better to study how to create and nurture a retirement portfolio than to permanently wreck it?
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The unusual answer is: knowing how you can destroy your retirement is key to designing a successful and long-lasting retirement nest egg. Considering the opposite of what you want is a very powerful tactic when applied to investing.
Known as "inverted thinking," the concept was first brought to my attention by Warren Buffett's business partner, Charles Munger.
Munger is on record saying, "Invert, always invert: Turn a situation or problem upside down. Look at it backward. What happens if all our plans go wrong? Where don't we want to go, and how do you get there? Instead of looking for success, make a list of how to fail instead -- through sloth, envy, resentment, self-pity, entitlement, all the mental habits of self-defeat. Avoid these qualities, and you will succeed. Tell me where I'm going to die, that is, so I don't go there."
It is in the spirit of Buffett and Munger that I came up with the idea for this article. Knowing how to destroy your retirement is the key to successful investing!
Here are three ways to destroy your retirement:
Your retirement portfolio is not where you should speculate with your money. Financial speculation is defined as the practice of engaging in risky financial transactions in an attempt to profit from short-term fluctuations in the market value of a tradable financial instrument --rather than attempting to benefit from the underlying financial attributes embodied in the tool. While there is nothing wrong with speculation and it can lead to outsized gains, using your retirement funds to speculate is a sure way to destroy your future.
A classic example of ruining your retirement by speculation can be seen with the cryptocurrency craze. As you know, I am a considerable cryptocurrency/blockchain proponent, but I've always urged to exercise caution and never invest money that you cannot afford to lose in Bitcoin or any other crypto product. Unfortunately, many investors threw their retirement savings into the craze at and near the top of the market. Still, others piled in as the prices plunged attempting to get a bargain. Well, most of these folks have been hurt badly financially, and I personally know several who had their retirement funds just about wiped out over the last six months or so.
You can speculate in even supposed safe investments by trading in and out rapidly. Remember, speculation is not instrument-based but rather how you approach investing.
To be sure, there is nothing wrong with speculating with money you can afford to lose. In fact, I love speculating, but never use your retirement nest egg!
2. Borrow Against Your IRA
In all but the direst circumstances, using your IRA/retirement account as collateral for a loan is foolhardy. Even if you have a solid repayment plan, don't do it! The reason being is that should something go wrong, the years of effort to build your funds can easily be ruined.
Apparently, if it is a critical situation, then an exception can be made. However, borrowing against your IRA merely is too risky!
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3. Being Too Safe
Isn't this is in direct contradiction to "don't speculate"? No! Let me explain. Many retirees keep their funds in saving accounts and very low yielding CDs or money market accounts. Sure, this is safe, but the returns are usually not high enough to turn a modest account into enough needed for a comfortable retirement. The smart risk is a must to grow your account at the rate required to create a comfortable retirement in most cases.
Remember, the S&P 500 returned an average of 10% annually over the last 85 plus years. An investment made into an S&P 500 fund contains risk, but the long-term historical rewards outweigh the risk, making it a smart move.
Risks To Consider: No investment is truly safe. Even cash has its own risk factors. Relying on historical performance and diversification are the keys to reducing risk to acceptable levels.
Action To Take: Take a close look at your retirement portfolio. Are you making any of the above mistakes? If so, endeavor to fix the errors.