5 Painless Ways to Boost Your Retirement Savings
The most basic strategy for building wealth for retirement is to save as much as you can. That's certainly a good start. But you can also boost your retirement savings painlessly through better investment management. Here are five ways to increase your retirement savings by investing well.
1. Favor index funds. Index funds, which track an index such as the S&P 500 (^GSPC), offer two key advantages. They tend to outperform actively managed funds over the long term, and they are far less expensive to own than most other types of investments.
The cost advantage is critical. For example, if an investment earns 8 percent annual returns and 1 percent is charged in transaction fees, the net return is 7 percent. A $10,000 a year investment would grow to $2,071,255 over 40 years. That's not a bad return. But if you could lower your investment fees by just 0.5 percent, the after-fee return would rise to 7.5 percent. This simple change would enable your investments to grow to $2,363,859, a nearly $300,000 increase. Fees matter a lot over the long term.
2. Seek low cost advice. Investment advisers might charge 1 percent of assets under management or more. But there are much less expensive alternatives for those who need a little help. Vanguard, for example, offers investment advisory services for just 0.3 percent. There are also several automated investment services that charge fees of 0.25 percent or less, such as Betterment and WealthFront.
3. Rebalance regularly. As the price of stocks and bonds fluctuate, investments can deviate from an asset allocation plan. For example, a planned allocation of 70 percent to stocks can fall well below this target during a bear market. Rebalancing involves bringing your investments back into line with your original plan.
Rebalancing effectively enables investors to sell high and buy low. More importantly, rebalancing also maintains the risk profile established with the initial plan. Rebalancing is particularly important during difficult markets. Rebalancing your portfolio back into equities when the market is down allows you to capture more subsequent equity returns when the market recovers as well as maintain the asset class exposures of your target asset allocation.
4. Don't try to beat the market. Very few investors are able to beat the market consistently over time. Amateur investors and pros alike are more likely to underperform the market than they are to achieve oversized gains. In some cases the cost of trying is severe. In an effort to beat the market, investors often invest in stocks or market sectors that carry above average levels of risk. Even a few bad investments can cause considerable loss, particularly compared to simple investing with index funds. Investing is one time when being average is the goal.
5. Resist panic selling. Everyone wants to buy into the stock market when it's rising. The same psychology also applies when the market declines. Emotions take over, and you want to get out before you lose even more money. But this is a strategy that's guaranteed to lose money over time. A stock market decline is the prime time to be buying stocks, not selling them. But at a minimum, you should hold your positions.
Sticking with an investment plan during market fluctuations can be difficult, but there are several things you can do to help you stick with your investment plan. First, write down your plan. A simple spreadsheet with your asset allocation targets will suffice. Second, write down your rebalancing plan. A simple plan such as rebalancing once a year will get the job done. Third, index funds make investment management easier. With actively managed funds, you must consider whether losses are the result of poor management. You don't have to evaluate the performance of a fund manager when you select funds that track the market.
Funding your retirement accounts is certainly important. And by properly managing your retirement investments, you can boost your savings even further.
Rob Berger is the founder of the personal finance blog the Dough Roller.