Want to start your quest toward early retirement but don't know where to start? One way is to avoid the common mistakes. Take a look at these seven popular misconceptions identified by Jonathan Clements in his WSJ column.
1. Spending is a sign of wealth. If you try to spend your way to wealth, your closets may overflow, but your bank account almost certainly won't.
2. We have plenty of time to save. [I]f you put off saving for retirement until your children are through college, you have probably left it until too late.
3. Our portfolios will clock 10% a year. 10.4% is the return you would have garnered over the past 78 years if you had been 100% in stocks, incurred no investment costs and paid no taxes.
4. We can beat the market. Most market-beating efforts are doomed to fail because it costs so much to trade and because you pay such high expenses when investing in actively managed funds. These costs drag down returns, making it tough to earn superior results.
5. The bigger the house, the better. Yes, you will get to live in a larger place. But more of your wealth will be tied up in your house -- and that wealth may earn a surprisingly modest rate of return. Indeed, any appreciation could be wiped out by the hefty costs of homeownership, including closing costs, property taxes, homeowner's insurance, maintenance expenses, mortgage costs and the selling broker's commission.
6. The bigger the mortgage, the better. [T]his wonderful tax break is, I regret, costing you far more than it is costing Uncle Sam. Suppose you are in the 25% federal income-tax bracket and you incur $1,000 of tax-deductible mortgage interest. True, you might save $250 in taxes. But you are still $750 poorer.
7. We are missing out. Sure, some investors strike it rich. But they are rarer than most folks imagine -- and their example is more likely to lead you astray than to make you wealthy.
