Wednesday, January 22, 2014

5 Tips for a Better Retirement

Saving for retirement is such a huge aspect of one's financial life.  It can mean the difference between eating dog food in a cardboard box or eating caviar on a beach.  I know which one I prefer.  Investing for retirement doesn't have to be difficult.  The key is to avoid the big mistake of not saving and investing.

Start as early as possible

Starting to invest as soon as you can is a big factor in determining the amount of money you'll have for retirement.  Every year you delay investing increases the amount you need to save in order to reach the same goal.  That's the nature of compound interest.  Time in the market is much more important than getting the perfect asset allocation.

Automatically increase your contributions

Going hand in hand with starting early, is to automatically increase your contributions.  If you can only afford to contribute 5% in the first year that's fine.  But as you get raises you need to scale your contribution percentage up at least by the same percentage as the raise, preferably more.  Most retirement programs have the ability to automatically increase your percentages each year.  Take advantage of that for a more hands off approach.

Watch your expense ratios

Those pesky fees can be a big drag on your returns.  The expense ratio is the percentage of assets that mutual fund companies take each year for their management services.  That's whether the fund was +30% or -10%.  A 1% expense ratio can reduce your ending balance by over 20% over a 30 year period compared to a 0.20% expense ratio.

Consolidate your retirement accounts

The average baby boomer born between 1957 and 1964 held 11.3 jobs between the ages of 18-46.  With the deterioration of the two way loyalty street between employer-employee, young workers are expected to increase that job count number.  With each new job comes a new retirement account.  Move your funds into one or two accounts to simplify your retirement picture as you change jobs.  Plus you'd hate to find out you had an extra $50,000 sitting in an account that you had forgotten about.  Click here to find lost superannuation.

Avoid mainstream financial news

Ignore the noise that is the financial news.  Sticking with your investment strategy doesn't get viewers which means no advertising money.  The way to get viewers is to sensationalize the news.  It's always either doom and gloom or everyone's going to make millions in the next market run.  It just plain doesn't work that way.  Come up with an investment strategy and risk tolerance that you're comfortable with and stick to it.

Saving for retirement doesn't have to be difficult and for the vast majority of people a simple approach of index investing will do very well for them.  The key though is to start early and increase your contributions.  The markets will take care of the rest and you'll be able to enjoy your much deserved retirement.

8 comments:

  1. All great advice JC. Especially the first one. Save early.......save often, because you never have any money to invest if you never save. And starting early has given my wife and me far more flexibility, even though we're only in our 30s.
    -Bryan

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    1. Bryan,

      I'm glad I started saving in my 401k as soon as I got my first job, but man I wish I wouldn't have wasted some of the money I earned in high school. Money earned my senior year would have already had 12 years of compounding underway.

      Flexibility is the key. Some people will want early retirement, others just want to be able to do as they please. If you didn't have any other sources of savings/income you couldn't take your year long road trip. Because you had put in the work before, you can afford to take a year off of work now. That's amazing!

      Thanks for stopping by!

      Delete
  2. Expense ratios are a huge ROI killer. Most people don't take the time to consider fees when investing, or can't avoid them in places like a 401k.

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    1. First Million,

      The good thing though is that if expense ratios are hurting your ROI, at least that means you're saving/investing. That's much better than a lot of people. Expense ratios can kill your returns. The 2 401ks I've had have offered at least one broad market index fund and that's where I park the majority of my 401k savings.

      Thanks for stopping by!

      Delete
  3. "Start as early as possible" - I think that is the most important point.
    But how can you explain it to your children, that they start with 18 or 20 years already...
    That´s not easy.
    I wish the school system would help us...

    regards
    D-S

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    Replies
    1. D-S,

      Starting early can be a big boost. For every year you wait, it takes that much more to make up for the lost time. Compound interest takes time to work.

      I've thought of how I'm going to go about teaching them but I think it really needs to start at an earlier age. You don't have to go full on stock analysis with them but you lay the foundation through your own example of how you handle money and taking the time to teach them slowly. A lot of bloggers go with the save/invest/give route for any kind of money they receive starting when they're old enough to understand the basic concept of money. I think that's the route I'm going to go.

      Of course, showing them that you were able to have FI/ER is a great example while raising your kids.

      Thanks for stopping by!

      Delete
  4. I love the advice of getting started now, and that time in the market matters more than a perfect AA. I'd also say that, at least when you start investing, your savings rate matters a lot more than AA, or what investments you pick. If someone's just getting started, an extra 10% put into retirement accounts is going to matter more than chasing an extra 10% in returns.

    Good stuff!

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    Replies
    1. Done by Forty,

      The best time was yesterday. The next best time is today. And the next best time after that is tomorrow. In other words, ASAP. Your savings rate will be the biggest factor in growing your portfolio in the beginning. If you have $1k invested and earn 10% you've now got $1.1k. But saving another $1k puts you at $2.1k. Eventually though that relationship changes and how well your money works for you will contribute so much more than whatever it is your work for your money.

      Thanks for stopping by!

      Delete