Planning your retirement is not an easy job. Some of us start very early in their early 20’s, but most of us only realize the importance of retirement savings later on in life. It is never too late to start saving, and investing to prepare your retirement. Although some get ahead due to the compounding effects of starting early on in life, you shouldn’t throw out the retirement savings idea just because you think it’s too late. There are many ways to start this process, but the best way is to start small. Implementing small changes in your life could have a great impact and it does not take such a big effort. As you get closer to retirement, and also get used to the idea of saving and investing regularly, you can start increasing the amount you save monthly.
A great way to start planning your retirement is through budgeting. Most of us are not so organized so the idea of budgeting every expense in your life sounds like OCD. Start small, let’s say a monthly budget for grocery shopping. As you start getting better at it, and following your monthly budgets, start thinking of the long-term. Although unexpected expenses sometimes surge out of nowhere, some of them can be budgeted. Let’s say for instance you have kids, and they are going to college. Start preparing for those big expenses throughout your life, so you have a better idea of how much you should save.
Saving is the number one key to financial independence, and to retiring early. If you are not used to saving, it can feel overwhelming and suffocating to always have your expenses under control. As you start getting used to the idea of delayed gratification, you can slowly increase your monthly savings. This is an important step, and allows you to prepare your budgets more clearly. It will allow you to start putting some money on the side, towards your retirement savings. On top of that, some of that retirement money that you have been saving, should go towards investments that can give you capital appreciation and generate income.
Investing throughout your life and especially for retirement requires a well defined strategy. This step is important because it allows you to set goals, and see the long-term benefits of your decisions. Although planning your retirement savings, and your investment strategy might not be the most exciting activity out there, it is crucial to have a clear view of your life when you finally cease to work. The key here is to accumulate assets that will create wealth for you over time. Some people prefer individual stocks, some go with mutual funds, or even ETFs. If you have no previous experience following the stock market, and picking stocks for yourself it can get complicated.
ETFs are a great simple way to get exposure to the stock market without actually having to do much work. They work essentially like mutual funds, but the difference is that they can be traded on a stock exchange daily, hence the name Exchange Traded Funds. As a customer you pay a simple yearly fee that is deducted to your overall investment in the particular ETF. Be careful here, as some ETFs charge very high management fees, that will ultimately affect your returns and take part of your hard earned investment money.
ETFs offer a plethora of different themes and special exposures. Some ETFs are focused on dividends, or high growth, or value. It all comes down to what kind of investment you want to make. Some ETFs also target a specific geographical exposure. So let’s say you want your stocks to give you exposure to Brazil, you can buy a Brazilian ETFs. All in all they are a very efficient way of investing your money, and have a professional manage it. You can also choose to invest just in some sectors that you think are going to grow very fast. From another point of view you can also exclude investments in areas, which you do not agree with, such as oil, coal and tobacco.
Another important aspect is to look at the past performance of a specific ETF. This will allow you to get an idea of what kind of returns you can expect from your investment in this kind of fund.
5. Mutual Funds
Mutual funds are very similar to ETFs, in essence they are a fund with a large pool of holdings, some of them are also targeting specific themes. The main difference between the two is the fact that ETFs are easily traded in the market, as opposed to mutual funds. To invest in a mutual fund you need to subscribe to the fund. Although ETFs usually only charge management fees, mutual funds can sometimes charge multiple fees. Some mutual funds are known to charge subscription fees, this means that when you invest some money in the fund they take a percentage of it right away. Another common fee in mutual funds is the redemption fee, which is deducted from your investment once you cash in.
Due to the high fees in some mutual funds, they tend to be an investment vehicle that has become somewhat obsolete. In comparison ETFs are much more accessible to the general public, and are easier to trade. You just log into your broker and put a buy order. Once again, it will be important for you to analyze the holdings of each fund and to see what the past performance has been like. Another great way of accessing a fund’s quality and possible returns is to look at the career of its portfolio manager. Analyze it thoroughly so that you can set your return expectations accordingly. Here are some of the best mutual funds in 2021.
Individual stocks are an option for those of us who are familiar with the companies you are investing in. It is far more risky than any of the options named above. Simply because the risk of owning one stock is considerably higher than owning multiple stocks through a mutual fund or an ETF. It requires you to analyze the company thoroughly. Lack of due diligence in analyzing individual stocks could spell trouble ahead and make you lose money.
Once you have selected a company that you are familiar with and want to invest in, study its financials. I cannot stress this enough, studying and reading the financials is perhaps the most important step before making any decisions to invest in an individual stock. One you are familiar with how the company has performed in the past, you can start valuing the company. The value of stocks is dependent on many individual factors, and this is why it is key that you are familiar with the industry and the specific company. If you conduct your investments with lots of attention to detail you are bound to do well over time.
Most retirees choose dividend stocks that consistently pay dividends. Dividend aristocrats are among the most obvious choices for people looking to increase their wealth for retirement. This is because dividend aristocrats are stocks that have paid and increased their dividends for over 25 years. They are usually blue chip stocks, with consistent and reliable earnings, that will give you income for years to come.
Index funds are another popular investment vehicle, touted by some as the safest and best long-term investment you can make. Even Warren Buffett is a fan of index funds. Index funds were created to track a particular stock index. When you buy an index fund, you essentially buy a small part of all the companies traded in that index. This becomes a very safe and reliable investment vehicle because over time, indexes tend to appreciate in price.
Although investing in index funds is a good and safe option, it might not be the best for you. Look at what kind of returns you can expect from individual stocks, mutual funds, and ETFs. Compare them with the expected returns on index funds and make your investment decision accordingly. Although they are a great, and simple way to invest – index funds are inefficient to some extent.
Build Your Retirement Portfolio
We have shared here the most common investment vehicles for those of us looking to start their retirement funds. The reality is that you can combine some of these vehicles in a well built portfolio that will do well over the long-term. Try to access your risk profile, and based on your age and retirement goals – build a portfolio that meets your needs and let’s you achieve your goals.
Retiring is not a race, some of us get there faster and some of us take more time. It is all about the journey towards financial freedom. Plan, save, budget, and invest, but remember to enjoy every step of the process. The more effort and time you put into this endeavour the easier, and faster it will be for you to achieve your ultimate goals.