You Might Be Building a Bad Retirement

It's easy to be deluded about your retirement prospects. Even years of socking away money and earning double-digit returns may not be enough to keep you from a gruesome retirement.

You need to save a lot and earn a lot. Many of us are focused mainly on one, not the other. Consider the following grid:

Save Poorly

Save Well

Invest Poorly



Invest Well



Let's take a closer look at its components.

Saving poorly
If you're on track to accumulate $1 million by retirement, that's impressive -- congratulations! However, $1 million may not be enough. Per Robert Brokamp in our Rule Your Retirement newsletter, you should be aiming to withdraw about 4% of your nest egg annually (adjusting for inflation). That would give you $40,000 in your first year, which may be less than you expected.

Worse still, the vast majority of Americans are not even close to being on track to hit $1 million. According to the 2011 Retirement Confidence Survey, 67% of Americans have less than $50,000 socked away. If you think you're OK because you're doing something, like maxing out your IRA with $5,000 annually, that may still be far from enough.

Investing poorly
Even if you've got plenty saved, there are far too many ill-advised ways to invest that money. You might have too many eggs in one basket. If you sink all your savings into shares of a single stock -- especially if that stock is your employer's -- or even a single sector, you're leaving yourself more vulnerable than you would be with a more diverse set of holdings.

Investing too aggressively in highfliers or penny stocks is another bad move. So is investing in companies you don't understand very well. You might love having Sirius XM Radio (NAS: SIRI) in your car. But before you buy shares of the company, or in Liberty Capital, which owns about 40% of Sirius, make sure you also know that the satellite radio provider's saddled with a lot of debt. It may still do very well, but its investors should understand its full picture.

Eastman Kodak (NYS: EK) may look like a sure thing with a stock price below $3 per share? But despite its famous brand name, its revenue has been shrinking, it's posting losses, and it doesn't have many competitive edges beyond consumers' fond memories of its former glories. Its lawsuits against Apple (NAS: AAPL) and Research In Motion (NAS: RIMM) for patent infringement seem like desperate moves. Remember that $3 stocks can still become $2 or $1 stocks.

On the flip side, your strategy might not be risky enough. It's tempting to stick with investments that offer you some guarantee or minimal volatility, but those rarely grow very quickly. CDs, money market funds, and bank accounts these days don't even come close to the long-term 3% average rate of inflation. Over the long run, you'll actually lose purchasing power with those investments.

Get in the best quadrant
For the best chance of a comfy retirement, you want to save AND invest well. With health-care alone able to eat up a big chunk of your nest egg, socking away the usual 10% of your income might not be enough. It certainly won't suffice if you're starting late, with only a decade or two from retirement.

Take some time to estimate what income you'll need in retirement. Here's a quick trick: If you expect to draw down your nest egg by 4% per year, and you want a $60,000 income in retirement, multiply that figureby 25. You'll get $1.5 million -- the nest egg you'll need to yield a 4% withdrawal of $60,000 in its first year. Adjust your calculations to account for what you conservatively expect to get from Social Security, any pensions, and any other income streams. (If you have no pension, consider buying yourself a pension near retirement via an immediate annuity.)

Take on the right risk
As you think about how to best invest your money, it will help to know how much you want to accumulate, and how far from that goal you are.

If you're well on your way to meeting your needs, you may want to play it safer with your investments, holding bonds and relatively stable dividend payers. National Grid (NYS: NGG) and WasteManagement (NYS: WM) , for example, aren't likely to go out of business anytime soon, given their respective focuses on electricity and gas networks and garbage. National Grid is a regulated utility, earning guaranteed returns on many of its investments, and it's updating its infrastructure, too. Waste Management is not only a trash powerhouse, but also a recycling giant engaged in many planet-friendly initiatives.

If you need to take on more risk in your portfolio in search of greater gains, do so carefully. You can find fast growers with truly compelling competitive advantages. Intuitive Surgical (NAS: ISRG) not only makes money by selling its robotic surgery machines to hospitals, but also enjoys a lucrative recurring revenue stream selling supplies and services for those machines. If you find great fast-growing stocks, consider parking them in a Roth IRA to best avoid the brunt of future taxes.

Don't shortchange your retirement. Save aggressively, invest effectively, and ensure that your golden years are as comfortable as possible.

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At the time thisarticle was published LongtimeFool contributorSelena Maranjianowns shares of National Grid, Apple, and Intuitive Surgical, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Apple, Waste Management, and Research In Motion.Motley Fool newsletter serviceshave recommended buying shares of Waste Management, Apple, Intuitive Surgical, and National Grid, as well as creating a bull call spread position on Apple and writing a covered strangle position on Waste Management. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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