For many people, retirement seems so far away, it feels normal to put off saving for it week after week. However, the early steps that people take to start saving or not saving for retirement can have a drastic impact on the life they can afford to live later on. There are several tips for investing wisely in your retirement.
Start Saving Early
Young investors have something that older investors can never get back. Time can be one of the most valuable investment tools in your portfolio. Someone who starts saving for retirement at age 25 will need to save far less per month to reach their retirement goals than someone who waits until they’re 35 to begin saving. Compound interest can set a person up for a long and fruitful retirement because interest earned on an investment is constantly being re-invested and earning its own interest.
Avoid overspending now
Keep a weekly and monthly budget of all your expenses, and be careful not to exceed the “want” vs “need” ratios. Factor in retirement savings when planning a budget, even if you think it’s too soon.
Plan For A Safe Withdrawal Rate
A withdrawal rate in retirement is the amount of money you take from the initial principal each year. Usually, experts recommend the 4% rule which argues your savings should last up to 30 years if you only withdraw 4% of the initial amount during each year after retirement. This amount also gets adjusted for inflation. While this is a good rule of thumb, everyone’s retirement situation is different, so if you plan to retire earlier than 65 and need the money to last longer, a lower withdrawal rate may be a safer bet.
Minimize Investment Fees
Some investment firms make wild claims about the returns they can get for investors. While some of them may be able to back this up, there are usually hidden investment fees to be paid for their services. This means that your return will actually be smaller that it appears on paper because a portion of the earnings must go to the financial advisor who made the trades on your behalf. Typically, if you are still years away from retirement, the best bet is to invest heavily in low cost ratio index funds that track large stock indexes such as the NASDAQ or S&P 500.