From grade 5 through the rest of our lives we are being taught that the market is the place to put money yet none of us really know anything about it. When you sit down and really think about it, why are you putting money into a system you know little to nothing about?

Everything we buy in life we put some sort of research and effert into our decision. Yet the biggest thing we ever save for in life we just hand over to someone else to manage and we ask few questions and in most cases they teach us very little about it.

There are 3 things you really need to know that you are not being told or taught. These three things are the difference of retiring with money or broke and not retiring at all. It is that serious.

1. Average Rate of Return

I have wrote about this already in my blog Market Math so I will just touch on it here.

The most common term in the financial world is average rate of return. We all know the higher this number the better. However this number lies to us:

For example look at the chart below. You start with $10,000 and earn 100% so your ending balance is $20,000. The next year you lose 50% and you are back down to $10,000. The third year you earn 100% and you are back up to $20,000 and the fourth year you lose 50% again and your final ending number is $10,000.

You started with $10,000 and ended with the same $10,000. Investors would say this is a AVERAGE rate of return of 25%, because it is. That is the average. The ACTUAL is 0%! You did not make a dime, yet they lead you to believe you made money and they were doing you a favor.

Average means nothing, actual means everything.

avg vs actual 1

2. Time will make up the lost money/Risk is ok when you are young

Again, look at the following chart. It proves this is another huge misconception. What this is showing you on the left, is a savings vehicle that pays a steady 5% without interruption. After a ten year period you would have $16,289. When you look at the right side you are seeing a market loss of 20% year one and from then on a steady gain of 8%. After a ten year period that one time loss of 20% left you with $15,992. Less than the tiny 5% steady rate! 

A loss at anytime is detrimental to your retirement system. Many think they have made the money back, that is because they continue to contribute. take out your contributions to see the true growth of your investment.

10 year market with one loss

3. Company match is free money

I too have wrote about this in my blog post, Why Your 401K Match is a Lie, but will touch on it again here.

As you see, I have two calculations, the one on the left is your contribution of $3,000/year growing at 4% over the next 25 years and the one on the right is the company match of 100% performing just as yours does.

   129,935
+129,935
=259,870 at retirement

You have to pay tax on this money, so lets assume a 35% tax bracket.

259,870 X 35% = $90,954.50 goes to pay taxes

70% of your match went to taxes! 

401K Match

Yes you will hear stuff like you’ll be in a lower tax bracket. That is not true unless you are forced to live on less than you are living on today. Do you want to change your lifestyle? I don’t. Read the other blog to get more details on this.

These 3 things can be the difference between retirement or not.

Mary Jo