13 February 2006

5 Ways to Idiot-Proof Your IRA

The Motley Fool (which I love for general advice but not necessarily for stock picking) has a commentary on idiot-proofing your IRA.

While the list is not exhaustive, following these five ideas will go a long way to pumping up returns for retirement.

* Stop ignoring the little things
* Don't overpay The Man
* Avoid overdosing on accounts
* Keep your hand out of the cookie jar
* Don't diss dividends

The two most important items on that list are the last two. Cashing out 401(k)s when you leave a job is retirement suicide. You might as well be asking to survive on dog food in your old age.

Chasing the latest growth stock is another way to the poor house (or at least to the "not as rich" house). Why?

A Standard & Poor's study found that from 1980 to 2002, dividend-paying stocks returned an annual compounded 2.7% more than non-payers did.

Perhaps you've heard of ExxonMobil, Coca-Cola, and Johnson & Johnson? (OK, so that last one does conjure up images of Grandpop, but still.) If, in 1980, you had purchased $2,000 of each, today you'd be sitting on a portfolio worth close to $360,000 by deferring taxes and reinvesting dividends.

Not a bad return for 25 years of no work, eh? If you had cashed out that $6,000 in 1980 (see point 4) you'd have zero and whatever you spent it on you'd likely no longer have (even that sweet tv you've had your eyes on).

Easy advice to follow, but it could be worth literally hundreds of thousands of dollars in retirement.

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