There is no trick involved in retiring comfortably. It’s often difficult to accept that you can obtain extraordinary results by ordinary means, but our desire to rely on a wing and a prayer can have devastating consequences on our retirement savings. Understanding the basics of your finances and investments can be as easy as reading a few finance and investment news articles on a regular basis.
The key factors to financial security in retirement are time and commitment. Here are 5 tips, which will help you pave the way to a comfortable retirement:
Always have a plan
The first step is to identify your goals. As a rule of thumb, you should aim at saving approximately 17 times your pre-retirement salary by the time you retire. This is, however, based on a certain set of assumptions: Therefore you may have to adjust your savings plan if your investment returns and spending habits deviate from the assumptions. It is important to note that the sum you are required to save to meet your goal will increase as you near retirement if you don’t start saving early enough. The earlier you start, the longer you have to benefit from compound interest.
You must account for inflation
Inflation erodes the buying power of your money; therefore your returns need to compensate for this effect. Risky, high-return investments can fluctuate wildly over the short term, but the key here is to remain calm. Instead focus on taking a long-term approach: Look at the returns over a 3 – 5 year period, since short-term fluctuations typically smooth out over time.
You can’t predict the future
Investments can and will undergo short-term fluctuations. Uncertainty in the market can make people uncomfortable and, as humans, we have a bias towards action. We tend to respond emotionally to a short-term downturn in the market, which can lead to switching. Switching is the act of selling one investment and buying another. The best thing to do in these situations is often nothing, as switching can often destroy the value of an investment and lock in losses. The most important thing to remember is your long-term goal.
Diversification is only effective if done in a meaningful way. Most people view diversification as the act of investing in many different unit trusts, but this only really works if the investment consists of different assets or the unit trusts are managed in a variety of ways. It is less effective if you invest in similar unit trusts.
A balanced fund can give you exposure to a variety of asset classes, but investing in multiple balanced funds does not necessarily mean greater diversification: Finely spreading your investment could net you returns that are no better than the market average, while you pay higher fees.
Start as soon as possible
Many people view saving as a sacrifice. It can be difficult to put money aside for the distant future, especially when you first start working. That’s why many people opt to skip the first 10 years of saving, thinking it will have minimal consequences on the future. What they fail to take into account is the effect of time on financial success. Compound interest is the real magic behind turning a portion of your income into a comfortable retirement and its key ingredient is time. Delaying your savings plan by 10 years could potentially lose you almost half of your prospective returns than if you started on day one.
If you haven’t started yet, then the best time is right now. These basic tips will not be easy to implement. They require discipline and consistency. There is no magical solution. Your future is under your control.
If you feel overwhelmed then why not consult a good independent financial advisor who can help you make sense of all the information and formulate a plan?