Almost invariably, when the subject of financial advice is broached, the importance of saving for retirement is brought up. Saving for retirement is undoubtedly one of the most important things that young parents can do, but many put if off for years and end up significantly damaging their financial security as a result.
Why saving for retirement ignored so often? My view is that there are two main reasons: 1) Retirement is a long way off and there are many real current needs that feel more important, and 2) There is a lot of information out there that makes investing sound complicated and scary, and the result is that many people try to avoid the subject altogether.
I’d like to address #2 right now. Good investing is not complex nor technically difficult, though it can certainly be behaviorally difficult. What I mean by this is that there are a few simple rules that, if followed, will put you well on your way to investment success. The rules themselves are simple and straightforward, but actually following them can be difficult.
Rule #1: Save Enough
The most important factor in investment success, especially early on, is your savings rate. The more you save, the more you will accumulate over your lifetime. A good rule of thumb is that you should be saving at least 10-15% of your gross income for retirement. Whatever you decide to invest your money in, there’s no substitute for a strong savings rate.
Rule #2: Start Saving Early
The earlier you start saving, the less money it will take for you to reach your retirement goals. This is simply the magic of compound interest at work. Even if you feel like you can only start with a small amount now, simply starting is a huge step in the right direction. And if you feel like you’re already past the age where you would consider it “early”, so what? Just start now. The longer you let your money be invested, the more it will work for you.
Rule #3: Minimize Costs
There are many potential costs involved with investing, but the two biggest are taxes and the fees imposed by the investment companies. There’s no need to pay a lot for investment products. There are many low-cost index mutual funds available from companies like Vanguard and Fidelity that over the long-term will perform much better than almost all of the higher-cost options out there.
Taxes can be minimized by utilizing your tax-advantaged accounts (401k, IRA, etc.) to their full extent and by minimizing trading activity. The more often you make trades, the more you’re exposing yourself to taxes. It’s a little strange, but by simply doing nothing but sticking with the funds you have, you’re probably saving yourself a lot of money over trying to constantly switch to the latest and greatest product.
Rule #4: Pick a “Good-Enough” Strategy and Stick With It
It’s important to know that there are many strategies out there that are “good-enough”. By that I mean that, if followed consistently, they give you a good chance of producing strong investment results. And these strategies are not complex. One example would be to use two mutual funds, one representing the entire US stock market and one representing the entire US bond market. You can simply split your money 50-50, or 60-40, or really however feels comfortable to you, and that would be an example of a “good-enough” strategy. Not only is it simple and straightforward, but over the long-term it will almost undoubtedly be more successful than many of the crazy, convoluted strategies you’ll hear about from friends or on the news. In this case, simpler is almost always better.
Once you choose a strategy, it’s incredibly important that you stick with it, even when the current results aren’t all that good. Good investing doesn’t take a lot of technical ability, but it does take the emotional strength to stay consistent through good times and bad. When you start changing your strategy each time the market conditions change, you will end up doing much more harm than good.
The four rules presented above are all simple. None of them are technically difficult to implement or require much financial know-how. If you can believe in them and follow them through the ups and downs, not only will you put yourself in the best position for investment success, but you will save yourself a lot of stress.
It doesn’t require a lot of time or financial know-how to be a successful investor. Follow the rules above and you’ll do great.