Everyone envisions retirement as the golden years where you live a lavish life off your substantial nest egg. The sad reality is that most retirees find themselves having to get a second job to maintain their standard of living. Everybody should be rich at retirement. All it takes is the proper long-term planning throughout one’s career. Three of the most important keys to retiring rich are sound investment strategies, smart spending habits, and setting financial goals. Let’s look at these three areas in more detail.
Sound Investment Strategies
The biggest difference between retiring rich and having to work a part-time job is sound investment strategies. Research has shown that those with a solid knowledge of investment strategy earn an average of 1.3% more annually than their peers. That amounts to over 25% more in their retirement fund over the span of a 30 year career. So what do these people understand that others don’t?
There are 3 basic principles to a good investment strategy. The first principle is understanding interest rates. Most savings accounts earn an annual interest. For example, you’d accrue $1 in interest on a savings account that has $100 and 1% interest. The problem with savings accounts as a long-term wealth building strategy is the inflation rate; which is the second principle. If you have a 1% interest rate but the inflation rate is 2%, then the value of your money will decrease 1%. Over the long-term your best option is to invest in a money mutual fund. Money mutual funds often let you draw from it as if it was a savings account, and offers an interest rate that is generally higher than the rate of inflation.
The third and most important principle is risk. Managing risk is the difference between the millionaires and the investors who go broke. Beware of the shady stockbroker who will sell you the financial equivalent of snake oil just because it pays a higher commission. Your safest option is to always understand an investment enough to make an educated decision independent of anyone else’s influence. You have to fully understand the level of risk you are comfortable with, and as long as you don’t cross that line you will see sustained return on investment over the long term. One of the less risky investment options is a stock mutual fund, which diversifies your investments into several companies instead of a single stock in one company. This is like hedging your bets at the roulette table.
The final piece of investment advice is to understand the difference between investing in stock and investing in bonds. Basically, you should always opt for stocks over bonds if you’re in it for the long-term. Stocks may be more volatile short-term but they pay exponentially more over the long-term.
Smart Spending Habits
Next to investment strategies, smart spending habits are the most important factor for being rich in retirement. The spending habits regarding your cash is way less important than your credit spending habits. No matter how bad you are with cash, you can’t spend cash you don’t have. The biggest danger of being bad with cash is it forces you to rely on credit more than you should. This starts a downward spiral that makes saving for retirement virtually impossible.
The biggest killer of retirement dreams is debt. Millions of people bury themselves in debt by using credit to spend money they don’t have. This leads to bad credit, which in turn leads to more expensive payments for things like mortgages and car payments.
The best way to use credit is to treat it like a debit card. For example, if you make a $200 purchase you should have that $200 by the end of the month; otherwise, you should not make the purchase. If you stick to this strategy religiously you will never spend money you don’t have.
This purchasing strategy of paying off all purchases at the end of the month lets you avoid interest charges on most cards. It also builds great credit, which saves you money in the long-term through low interest rates.
Be smart when choosing a credit card. There are several options that offer all types of rewards, from cash back to flight points. Do your homework and select the best card that fits your spending style.
Setting Financial Goals
The third and final component of being able to retire rich is setting financial goals. One of the most popular financial goals is the “100 rule”. This rule states that to determine which percentage of your assets should be in stock, you subtract your age from 100. Some experts say this should be 110 minus your age.
The important thing to remember is that there is no such thing as too young to think about saving for retirement. All you have to do is make sound investments from the first year of your career and by the time you retire those stocks will be able to fund a retirement lifestyle fit for the rich and famous.
The other aspect of setting financial goals is a healthy mix of long-term and short-term savings goals. For example, say you have 20 years until retirement and you want a million dollars to live on. You can break down that long term goal as a $50,000 increase on the return on investment of $50,000 each year. This helps make your lofty goals become concrete and obtainable.
When it is all said and done, retiring rich comes down to how much you commit to that goal. Retirement is something most people envision as a right, and they are sorely disappointed when they realize they need to pick up a part-time job to support their lifestyle. The reality is a high quality retirement comes from committing to an investment strategy from day one. Knowing the basics of things like interest rate, inflation rate, and risk is essential. If you can manage your credit well and spend within your means, your investments will flourish over the long-term and by the time you’re ready to retire you will have enough of a nest egg to live the high life.
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