6 Tips to Increase Your Odds of a Successful Retirement
Finances are one of the most common sources of stress that we face in life. Unfortunately, many people find themselves woefully unprepared. According to the U.S. Government Accountability Office, nearly one half of those approaching retirement age (55 and up) had nothing saved in a traditional retirement account such as a 401K or IRA. Having enjoyed the privilege of working with thousands of clients over my career in the investment field, we have identified a variety of ways in which you can dramatically increase your odds of a successful retirement.
1. Have an automated ACH transfer into your investment account every month. Even if it is only $100 a month, the habit of investing in your future on a routine basis, without having to think about it, will pay enormous dividends. Routinely adding funds into your account allows you to continually dollar-cost-average into securities. This type of savings and investment plan also further disciplines your spending budget. Just like you budget for your mortgage or rent payment, you should be budgeting for your down-payments on a future retirement. Many of our most successful clients have made this type of regular deposit a priority, and the benefits that it provides makes this an absolute no-brainer.
2. Maximize your annual IRA and 401K contributions. IRA’s and 401K plans are two of the best gifts that the government provides its citizens. When you make tax deductible contributions to your retirement every year, you are not only saving yourself via paying less in income taxes, you are also making that investment into your future, with all of the compounding benefits that come with it. Not maximizing your IRA contributions, leaves a ton of money on the table, and virtually assures you of a more challenging retirement. If your employer matches your contributions, do everything in your power to maximize that, as it is literally free money.
3. Avoid credit card debt at all costs. Nearly all credits cards have interest rates in the high-teens or more. Even Warren Buffett’s investment prowess cannot overcome that rate of negative compound interest. If you use a credit card, pay it off monthly. If you can’t afford to do that, you probably can’t afford the product or service that you are buying. That means a much more careful evaluation of your overall budget is likely necessary. Credit card debt is not tax deductible, unlike real estate or business loans. Paying off your credit cards should almost always be your first financial priority once interest is accruing.
4. Don’t try to be a real estate tycoon. Many people make some of their biggest financial mistakes with real estate. In strictly financial terms, it often can make more sense to rent, as you can avoid the heavy maintenance and property taxes. When you do own, buy what you need and can actually afford, instead of simply the home of your dreams. If your leveraged to the hilt and are constantly struggling to make your mortgage payments, your house can become much more of a liability than an asset. Bigger homes, are far more costly to maintain and your utility bills can increase exponentially. On the positive side, the mortgage interest deduction can be a very big benefit, and mortgage interest rates will often be your lowest cost of capital. Unless you have expertise as a handyman, or the capital to really make it an efficient business, renting out properties often ends up being more work than it is worth. If you get a bad tenant that tears up the house, or have trouble keeping occupancy up, the additional debt can really eat into your finances. Remodels and renovations almost always take far longer than initially planned, and are generally quite a bit more expensive. Compare these headaches with owning equities that have historically generated far higher returns, while requiring substantially less effort, and the attractiveness of being a small-time real estate tycoon fades very quickly.
5. Avoid being a market-timer. You will encounter a lot of charlatans in your life that will claims to have gotten out of the market at a top, or get in at the bottom, but almost nobody does this, and nobody does it consistently. When you invest, have a plan, whether that is value investing, index investing, etc. Any plan should fully understand that there will be bear markets and periods of under-performance. No strategy outperforms all of the time. From 2000-2010, the best performing mutual fund was the CGM Focus Fund, which compounded at 18% per annum. The average investor in the fund actually lost 11% per annum, because they were getting in after good performance, and getting out after bad. When mean reversion would occur, the investors in the fund kept getting burned. This is common in just about any fund or strategy, which is why we at T&T Capital Management, put so much effort into education and communication, so that you can avoid making those same mistakes.
6. Be judicious in you and your children’s utilization of student loans. There is undeniably a major crisis with student loans in the United States. Kids are not properly educated about basic financial and accounting concepts, while there is this myth that student debt doesn’t matter, because they have plenty of time to pay it off. We are not doing our children a favor by encouraging them to go to unaffordable colleges, where they spend their first 10-15 years out of college, with the noose of debt hanging around their neck. On the same token, many parents understandably try to lift that burden off their children, but end up causing major damage to their own retirement prospects. When evaluating colleges and careers, pay careful attention to the numbers. How much can one realistically expect to make in the given field? What will the monthly debt service be and for how long? What are the consequences of this debt as far as delaying other major life events, such as marriage, buying a home, etc?
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CEO/CIO T&T Capital Management