Must-Read Do’s And Don’ts For Growing Your Retirement Nest Egg
While everyone’s life is different, most people follow a similar financial trajectory. They begin in the adult world with debt from college and must take an entry-level job. Then, they spend the next few decades working hard, improving their pay, and putting money aside for a rainy day. Eventually, retirement arrives, and people start winding down their estates.
Saving for retirement is a life-long project and something that should start as early as possible. If you can begin in your twenties or thirties, you put yourself in a stable position when you retire. Over the years, your money will compound, and eventually, you’ll have a substantial amount in the bank, even if your month-to-month savings are modest.
Let’s say you put away just $200 per month for thirty-five years and receive the market rate of around 8 percent (the average historically), with a starting capital of $5,000. Consistent investment will yield a retirement nest egg of $502,440 – with more than $413,000 in interest alone. That’s a seriously impressive return.
When it comes to retirement, it’s all about consistency – keeping your plan in motion, no matter what happens. It means living modestly and focusing on the future. Take a look at these dos and don’ts.
Don’t Hold A Select Few Securities
Some experienced investors like to go “all in” on winners they think will yield outsized returns, but relatively few succeed. Picking stocks that will return double-digits over the long-run is virtually impossible. Only around one percent of shares, historically, are winners, offering investors consistent market-beating performance. Most companies are duds. So the chance that you’ll pick one that will allow you to retire comfortably is incredibly low.
Warren Buffett likes to pick individual stocks according to his principles, but even he sometimes gets it wrong. Smart savers, therefore, invest in a variety of stocks. Most of them will perform poorly, but some will return massive gains, helping to lift the entire portfolio over time. Remember, it doesn’t matter if most of your money goes to waste on low-performance firms. So long as your portfolio contains winners, it will generate a decent return overall.
Some investors engage in a practice called “heat chasing” – looking at the past performance of stocks and assuming that that will continue in the future. This sort of approach, however, is a bad idea in financial markets. Some stocks experience momentum effects, but not all. And the vast majority return to fair value in the long-run anyway, meaning that you’re no better off than you were before.
On a similar point, you should diversify as much as you can when choosing a portfolio. The idea here is to spread risk as widely as you can, improving your risk-adjusted return.
Buying the stocks of dozens of different companies is one way to diversify, but there are other methods too. For instance, international investors like to buy stocks denominated in multiple currencies to reduce foreign exchange risk. Once investors own a big basket of money, the risk of significant fluctuations in the value of one against another goes down.
If you use a forex website, you can trade different currencies through a broker. Buying dollars and selling pounds could help rebalance your portfolio and reduce the overall risk you face.
Don’t Focus On The Short Term
When you’re plowing lots of money into equities and bonds every month, it’s tempting to check the value of your investments regularly. But looking at where they are right now is pointless, especially if you only plan on withdrawing money in thirty years, once you retire.
It takes around ten years to get a sense of the average return of a stock portfolio. There’s a lot of volatility in the short term, meaning that prices go up and down considerably. For instance, a portfolio might gain nothing for the first five years and then jump fifty percent in year six, delivering all the gains in a single year.
Having a long-term horizon actually makes your life much easier. While the stock market will bounce around in the short term, it tends to rise over the long-term, without exception so far in modern history. Give it twenty years, and practically every portfolio is worth more than it was when created, all thanks to the power of markets.
Putting your money into a retirement account is a way of investing in the future of humanity. It’s a good idea for anyone who expects technology to continue to improve. Today, the idea that things could stand still seems pretty far-fetched. It’s only a matter of time before technologies like AI and robotics become mainstream, delivering massive gains.
Please note, though, that this isn’t to say that you should never exit the equity market. Just know that market valuations can vary wildly, so you should be prepared to lose half the value of your stocks at some point. Keeping money in the game is often the best way to win.
Do Stick To Your Budget
We briefly discussed the importance of being consistent in the introduction, but it’s worth repeating here. Sticking to your budget is a vital part of generating the retirement savings you need to live a reasonable quality of life, once you’re no longer in work.
To do this, you’ll need to create a record of transactions every month and track what you’re spending. You’ll also have to come up with a figure for how much you’d like to save. It’s around ten percent of their income for most people, but the choice is very much up to you. A lot of people prefer saving hard early in life and then reaping the rewards later on.
Make sure that you choose something sustainable that you can continue doing, even in the long-term. Think carefully about future costs, such as the expenses associated with raising children. You may not always be able to put away the amount you initially specify.
Also, think carefully about averages saved over a year, not any specific month. There will be months when you can’t save because of random, one-off expenses. Please don’t pay too much attention to these: they happen. Instead, stay focused on keeping your average savings high. Some months, you’ll only save 6 percent of your income. That’s okay: if you aim to save 10 percent on average, all you need to do is increase your savings rate to 12 percent for the next two months, and you’ve dealt with the deficit.
Don’t Forget To Enjoy Yourself In The Present
We tend to live very future-focused lives in the west. We believe that so long as we work hard and do the right thing, things will be okay for us. Unfortunately, this puts us in the habit of always believing life will be better tomorrow, instead of enjoying it for what it is today.
Most of us look forward intensely to retirement. What could be better than determining how you spend your time and having a lot of money in the bank at the same time? But always concentrating on the next hurdle in life takes you away from your experience right now. And that still matters.
The trick here is to find ways to have a good time and save money at the same time. That’s the type of win-win you want. But how do you do that practically speaking?
Here are some ideas:
- Don’t stay in expensive hotels on holiday. Instead, go to hostels or camp for a fraction of the price.
- Avoiding meals out. Instead, organize family events at your home, cutting the cost of having a good time substantially
- Don’t run a car. Choose an electric bike to get to work or cycle. Hire a car for the rare occasions when you need to get out of town.
- Look for ways to save on your bills, such as switching to a cheaper smartphone, switching providers and installing energy-saving light bulbs
- Spend time with friends who discourage frivolous spending. Do inexpensive things for fun, like sports or trips to the park.
Do Pick Low-Risk Assets
Young people flush with cash can afford to pick high-risk portfolios, designed to offer massive returns over the long-term. People saving for retirement, though, need to be careful. When you get past the age of fifty, you don’t have the luxury of having vast amounts of time in front of you to earn more money. Thus, you need to make sure that you keep any savings you accumulate.
Traditionally, investors saw bonds as a low-risk asset. Still, the returns are now so poor that most people actually lose money to inflation – not what you want. Buying ETFs that represent a variety of stocks is a much better strategy because it covers all bases. You get something that will make decent returns while spreading your risk at the same time.
Therefore, growing your nest egg isn’t the most natural thing in the world, but it can pay off big if you act decisively and consistently.