3 Easy Ways to Save More for Retirement
By Dr. David Eifrig
Investing for retirement is difficult...
Keeping a constant eye on the markets, studying economics, staying on top of every trend without a misstep... that's time-consuming and confusing.
Worse, the 401(k) system is broken: Lack of guidance, poor websites, and limited investment options make most individuals' first foray into investing confusing.
But you can't hide from it. No one is going to rescue your retirement for you.
The good news is it doesn't have to be so tough. As you'll see below, there are just three keys to understanding 401(k)s. Learn these and you will truly change the quality of life in your retirement...
Let's get started...
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There are only three things you need to think about to earn an extra six figures in your retirement plan...
1. Asset Allocation
2. Low Fees
3. Index Funds
Let's quickly cover asset allocation...
Asset allocation means how you divvy up your capital among several categories of assets. By taking a broad view of the possible asset classes to hold, you can meet your retirement goals. Changes in the market get smoothed out by the diversified nature of the portfolio... leaving you to sleep well at night.
The key is doing it from the start and sticking to it.
First, you set aside some cash for emergencies... Then, start with a simple allocation: Decide between stocks and bonds. If you have a longer-term view and a high tolerance for risk, you might make your allocation 80% stocks and 20% bonds. If you are closer to retirement and don't like volatile returns, you could do 70% bonds and 30% stocks.
Most of us fall somewhere in between those extremes. When starting off, I suggest using an "in the middle of the fairway" asset-allocation plan: 60% stocks and 40% bonds. It ensures you harness the proven wealth-building power of stocks... while also using the conservative, income-producing power of bonds.
The point is to combine assets, like stocks and bonds, that are not perfectly correlated (meaning their price movements are not closely related to each other). Blending them in a portfolio smoothes out your total returns.
As you get closer to retirement, you can adjust your allocation to match your risk tolerance. For example, you can use the "60/40" asset allocation while you are in your 40s, 50s, and 60s... and then start increasing your allocation more to bonds when you reach your 70s.
Once you are comfortable with that basic stock-bond allocation, you can start to get more complex, dividing your categories among, say, domestic and international stocks. Or you can divide your bond allocation among corporate, federal, and municipal bonds. You can also add a small allocation to precious metals, or what I call "chaos hedges."
That's Step 1. With allocation, we've protected your portfolio from deep swings and ensured you'll have money until the end. Now, let's get into the nitty-gritty of fixing your 401(k)...
Hidden fees pervade the financial industry...
The fees on fund investments are even worse. The fees always look small to the untrained eye. A mutual fund can easily charge 2%-3% of assets without looking too expensive.
When the percentages are that small, it can seem like it's not worth your time to fret over fees. But that's completely wrong.
Remember, these aren't one-time fees. It's a 2% hit every year. Over time, that 2% adds up substantially. And it's particularly egregious considering you can find funds with fees as low as 1%, or even 0.25%.
Even more troubling, each year you pay a fee, you lose decades of compounding that would grow on top of that money.
The results add up...
Consider an investor who saves $5,000 a year, earns 8% in returns on investments, and pays a 2% annual fee. Over 40 years, he amasses $786,000.
If he cut that fee to 1%, he would finish with $1,045,000.
Think of how hard you work to save $5,000 every year for 40 years. It's not easy. No matter how much you earn, life gets expensive. Over all that time, you set aside $200,000.
But here's the catch, you can earn an additional $259,000... by just spending five minutes controlling the fees on your funds.
That's easy money.
And you can do even better than that. You should be able to get your fees to less than 1% if your plan has reasonable options.
Skeptics might wonder... When we switch to cheaper funds, aren't we going to get worse performance? Don't bargain prices mean bad funds?
Nope. The truth is the exact opposite...
The cheapest funds in the game are index funds.
Index funds don't have a Wall Street trader behind them, trying to outcompete everyone else and beat the market. (The majority of the smart guys fail.) Rather, index funds follow simple rules designed to help them track the overall performance of a particular asset class, like U.S. stocks or Treasury bonds.
Most "actively managed" funds (those with a manager trying to pick the best stocks) underperform the market year after year. In fact, 96% of actively managed mutual funds fail to beat the market over a sustained period.
That means you don't have a 50-50 chance of picking a "good" fund or a "bad" fund... It hardly even matters which one you pick. The vast majority are bad and won't beat the market.
On the other hand, index funds don't need to pay superstar managers or an army of analysts. Ironically, they keep costs extremely low and provide better performance.
Investors are finally catching on. The index fund industry is growing. According to the Investment Company Institute Fact Book, the percentage of stock assets held in index funds has grown from only 9.4% in 2000 to 20.2% in 2014. Over the last seven years, more than $1 trillion have flowed into index funds. Vanguard's Bond Index Fund recently surpassed PIMCO's Total Return Fund as the largest bond fund in the world.
It's likely your plan offers a few mutual funds that track an index.
By following these three simple steps, you can fix your 401(k) and boost your lifetime returns by hundreds of thousands of dollars... in just a few minutes.
So take the time to review your retirement plan today... It will be the easiest money you make in your entire life.
Here's to our health, wealth, and a great retirement.
[Ed Note: Right now, Doc Eifrig is giving new subscribers the complete blueprint to navigate Social Security. This guide gives you exactly what you need to do, what not to do, and how to do it… including 50 little-known ways to boost your Social Security. Click here to learn more.]