The Golden Rule for Investing for Retirement
Though market returns are an integral piece of your retirement and play a strong role in how much money you will have in retirement, unfortunately, it’s the one part where you have minimal control. Who knows where the S&P 500 will be 30 years from now, or how much the Barclay Aggregate index is yielding 25 years from now. Even worse, should you attempt to time the market, historically the odds are stacked against you as very few people succeed with this method regularly.
Instead of focusing on what is out of your control, let this be your number one rule: begin focusing on what is within your control and eliminate the rest. Too often, individuals spend far too much time watching and wishing the markets will move in a favorable manner. Rather than hoping, you can prepare by learning the tax benefits or shortfalls of your portfolio, identify if you are leaving money on the table and rethink the tolerance level of your portfolio, compared to your current financial goals.
Never Leave Money on the Table
Start by identifying where your money is going and how you can maximize your contributing potential. For example, if your employer offers a 401k match, that’s essentially free money that shouldn’t look over. In more simplistic terms, it can be viewed as a free annual bonus for your retirement account.
The benefits aren’t limited to free money, but also, it’s promoting healthy financial habits by enticing you to contribute more into your 401k plan. This not only is free money, but it is being deposited pre-tax, allowing you to potentially earn a higher return than a traditional brokerage account. Combine all of these with the power of compounding over time, then you are setting yourself up for a big boost once you enter retirement.
Stop Chasing Market Returns
Once you’ve identified money that may have been left on the table, begin ignoring the temptation to chase market returns. Media today does a wonderful job of making you think you’ve missed out on a great investment. However, sticking to your original plan through all market movements will likely yield you the better result.
Instead, begin focusing your attention on items that are in your control, such as the tax implications for your current portfolio. You may be surprised at how you can generate additional alpha by adjusting contributions on investments.
For example, depending on your situation, you may want to compare traditional IRA accounts with a Roth IRA. A traditional IRA utilizes pre-tax dollars and when it comes time to withdraw your funds, you are taxed at your income level. On the other hand, a Roth IRA utilizes post-tax dollars and when it comes time to withdraw your funds, you will have the luxury of not paying taxes on your distributions. There are certainly more specific items you’ll likely want to consider but you get the idea, instead of chasing market returns, begin structuring your portfolio in a manner that eliminates some of the tax burdens.
Rethink Your Tolerance
Lastly, look at your risk tolerance in relation to your current positions and investments. Studies have found that the average investor has underperformed the average mutual fund (which in turn has underperformed the market), the human mind is very manipulative and can potentially cause diminishing returns to your portfolio. For example, if the market is contracting and you fear your investments are unsafe, you may withdraw or move your investments, causing you to not only realize losses but potentially miss out on the market rebound.
Rather than letting your emotions get in the way or attempt to time the market, ensure you have an allocation plan in place that no matter the current market conditions, you’ll be able to continue investing. This could include a few mutual funds or equities you deem fit for your situation. The goal is to maintain your investing habits through both bull and bear markets.
Saving for retirement may seem intimidating or seem to have many factors, but the reality of the situation is it can be very simple. By focusing on what you can control, you may be surprised at how you enhance the efficiency of your portfolio. Begin by identifying any money you may be leaving on the table such as a 401k match. Then ensure you are limiting human emotion by not trying to time the market. Lastly, to avoid timing the market, have a well-built investment portfolio that allows you to allocate no matter the current market landscape. Saving for retirement doesn’t have to be difficult and if you focus on what’s in your control, you may be surprised with the results.