I consider myself to be an expert of sorts on retirement. Not because I’ve studied the subject, but because I’ve retired three times.

Yes, I’m a three-time failure at retiring. But I’ve learned from my mistakes. Today, I’d like to tell you about the worst mistake retirees make.

[ad#Google Adsense 336×280-IA]It’s a common mistake… Yet I’ve never heard it mentioned by retirement experts. Nor have I read a word about it in retirement books…

The biggest mistake retired people make is giving up all their active income.

When I say active income, I mean the money you make through your labor or through a business you own. Passive income refers to the income you get from Social Security, a pension, or a retirement account.

You can increase your active income by working more.

But the only way you can increase your passive income is by getting higher rates of return on your investments.

When you give up your active income, two bad things happen…

First, your connection to your active income is cut off. With every month that passes, it becomes more difficult to get it back.

Second, your ability to make smart investment decisions drops because of your dependence on passive income.

Retirement is a wonderful idea: Put a portion of your income into an investment account for 40 years and then withdraw from it for the rest of your life. Once you retire, you won’t have to work anymore. Instead, you will fill your days with fun activities like traveling, golfing, going to the movies, and visiting the grandkids.

But consider this: A retirement lifestyle for two, like the one I described above, would cost about $100,000 per year.

How big of a retirement account do you need to fund that?

Let’s assume that you and your spouse could count on $25,000 a year from Social Security and another $25,000 from a pension plan (two big “ifs”).

To earn the $50,000 balance in the safest way possible (from a savings account), you would need about $5 million, because savings accounts only pay 1% at most right now.

But middle-class American couples my age are trying to retire with an account in the $250,000 to $300,000 range. And that’s where the trouble begins. To achieve an annual return of $50,000 on $300,000, you would need to make 17% per year.

Getting 17% consistently over, say, 20 years may not be impossible, but it’s too risky for my taste.

I retired for the first time when I was 39. I put my money into AAA-rated municipal bonds (very safe at that time), yielding between 5% and 6%. It didn’t take long to figure out the math: At those ROIs, I could not maintain the lifestyle I wanted. To get higher returns, I would have to put my money into riskier assets. I had an instinct – correct, I think, in retrospect – that would end badly.

So what did I do? I went back to work.

I went back to earning an active income because I didn’t want to spend my days trying to “beat” the market and my evenings worrying about how I was doing. And do you know what happened? The moment I started earning money again, I started to feel better.

Retirement isn’t supposed to be a time of worrying about money. But when your income is entirely dependent on the return you’re getting on your investments, that is exactly what will happen.

As I write this, millions of Americans my age are quitting their jobs and selling their businesses. They are reading financial magazines and subscribing to investment newsletters. They are hoping to find a stock-selection system that will give them the 20% to 30% returns they need. But they will find out that such systems don’t exist. They will have good months and bad years, and they will compensate for those bad years by taking on more risk. The situation will go from bad to worse.

It doesn’t have to be this way. Let’s go back to the example of the couple with the $300,000 retirement fund and the $100,000-per-year retirement dream. If they each earned only $15,000 in active income and added that to their Social Security and pension, they would need a return of only about 7% on their retirement account, which is more realistic.

I am not saying that you should give up on the idea of retirement. On the contrary, I’m saying that retirement might be more possible than you think.

But you must replace the old, defective idea that retirement means living off passive income only. Paint a new mental picture of what retirement can be: a life free from financial worry that includes lots of travel, fun, and leisure. Funded in part by active income from doing some sort of meaningful work.

The first benefit of including an active income in your retirement planning is that you will be able to generate more money when you need to.

But the other benefit – which is less obvious – is that it will allow you to make wiser investment decisions because you won’t be a slave to your investments.

There are dozens – no, hundreds – of ways for a retired person to earn a part-time active income. You can, for example:

  • Earn $50 to $500 per hour working part- or full-time, from home or at the local coffee shop, as a freelance copywriter.
  • Follow a simple money-making formula to begin your own, fully scalable international trading business, acting as a highly commissioned broker by hooking up U.S. buyers with Chinese manufacturers.
  • Make $30 to $100 per hour as a tutor. Or you could put your friends and family to work as tutors and make $500 to $1,000 per hour.
  • Make $50 to $500 per hour running a home-based business that performs routine homeowner services such as lawn care, pool maintenance, tree trimming, or carpet cleaning.
  • Earn $50 to $100 per hour walking dogs and offering your clients other related services such as pet sitting, dog grooming, and obedience training.

Take this advice to heart and you’ll avoid the biggest mistake many retirees make.

Regards,

Mark Ford

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Source: Daily Wealth