If your Reading the Spring Chicken Club Blog you are probably over 40 and you have some retirement savings either in a 401(k) or IRA.
But if you have not yet achieved midlife or you are among the third of Americans who no retirement savings this is still good information and I wish I would have listened earlier when it cam to this type of advice.
If I would have…I would already be retired. Want to retire before 60? Keep reading….
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1. Start Retirement Saving as Soon as You Can
- The biggest retirement savings mistake is not saving for retirement.
According to the Government Accountability Office, 29% of those over 55 years old have no retirement savings at all.
But it’s not to late. Even if you’re only 5 years from retirement you can rack up some substantial savings if you prioritize it.
During my last “regular” 9-5 job I saved a little over $200K in just five years.
Most people spend money a bunch of stuff that they don’t need – with no great improvement in the quality of their lives.
If you pay yourself first – take your retirement savings right off the top before anything else. You will probably find that you don’t miss it you’re putting away a pretty good nest egg.
If your employer has a 401(k) match make sure to take advantage of it – it is basically free money.
2. Save as Much as You Can
- The Next big mistake is failing to make retirement savings a priority.
Save as much as you can as soon as you can.
The sooner you start saving the better off you’ll be.
If you put $1,000.00 in a Dow Jones index fund in 2000, you would have more than doubled your money by now with no further investment.
If you had saved the same $1000.00 in the same fund in 2015 you would sill have about 50% more than your original investment.
Most employers also have a 401(k) match which – as I said – is free money. If offered you should get as much of it as possible.
3. The Right Professional Assistance
- Retirement saving can ultimately involve hundreds of thousands or even millions of dollars. If you don’t understand how it works it can be an extremely costly mistake not to consult a the right professional.
I like this investing stuff, and I understand it well enough that I am writing this post to help all you Spring Chickens make the most of your retirement savings.
But I get it, you might read this and feel like you’re head is going to explode. I know that managing investments is not fun for everyone.
This post can still be very helpful in knowing what questions to ask when you look for some assistance. It’s also important to know when an “investment advisor” might be advising you how to make more money for him instead of making more money for you.
An investment advisor knows all of the ins-and-out of how finance and markets work. If they use that knowledge to help you, that’s a valuable service.
But you must remember that they are not doing this out of the goodness of their heart – they have to pay their bills too.
If a financial advisor is offering “free” advice – you absolutely need to know how they are getting paid, and what their incentives are.
For example: If you get a Target Date Fund – you choose the date you’re going to retire and the fund managers invest aggressively at first, and then re-balance to be more conservative as you get closer to your target date.
This fund has a net expense ratio of 0.08% which means Schwab will keep 0.08% of the money you have invested in that fund each year to manage the investment.
So if you have invested $50K and the fund increases increases by 10% you will pay Schwab $44 to manage your investment. If the market goes down 10% you will pay $36.
Totally worth it in my humble opinion.
4. Brokerage Account
- Allowing your retirement savings to remain in low return, high-fee investments when you have better options is a mistake. A brokerage account within your IRA or 401(k) can be a great way to take advantage of other options.
If you want to manage your own investments or even just a portion of them you’ll need a brokerage account.
A brokerage will allow you access to all kind of investments like stocks, bonds, mutual funds etc.
You can have a brokerage account inside your IRA, and some employers allow you to have a brokerage account inside your 401(k).
A brokerage account will allow you to buy index funds, avoid the fees and get better returns.
5. Mutual Funds
- Nearly all retirement accounts include mutual funds. It can be a costly mistake not to understand the different types of mutual funds – especially when it comes to the fees and expenses.
A mutual fund is where many investors pool money and then create a large portfolio where each investor owns shares.
Mutual funds were originally created to allow small investors to have the same type of diversified portfolio as much larger investors.
There are tons of different kinds of mutual funds and some of them are great for retirement savings. But this is an area that’s fraught with retirement savings mistakes.
There are fees and expenses associated with some mutual funds that you should avoid like front-load and back-loads
There are transaction fees and commission that you pay when you buy and sell some mutual funds.
Management fees are part of investing in mutual funds – I’ll explain below in the Expense Ratio section.
Before you invest in a fund make sure that you understand all the fees. Excessive fees might not look like that big of a deal, but a 0.5% difference in a management fee can ultimately cost you thousands of dollars.
6. Index Funds
- It is a mistake not take advantage of index funds if you can. They tend to be low on fees and expenses and higher on returns while giving you more personal control of your investments.
This is a type of mutual fund where the portfolio tracks a stock index like Dow Jones, NASDAQ, or S&P 500.
Bond markets have index funds, foreign market indexes and a commodities index.
If you think some sector of the economy is going to do well, there is probably an index fund for that.
For example, I have some shares in BOTZ , a fund that tracks the Indxx Global Robotics & Artificial Intelligence Thematic Index.
These are mutual funds so they do have fees, but they tend to be very low ~ about 0.01 to 0.07% of funds managed.
7. Actively Managed Funds
- Watch out for actively managed funds. It’s a mistake to assume that the extra fees will result in bigger return on your investment.
All mutual funds are technically “managed” but but there are different levels of management and they have wildly different fees.
When people talk about managed funds, what they are talking about is actively managed funds.
Actively managed funds have “experts” who are picking investments and continually balancing to maximize “your” return on investment, and they charge higher fees for this extra attention.
Actively managed funds are usually a mistake because in addition to fees that are 10 to 100 percent higher, Vanguard calculated that 65% of actively managed stock funds under-perform their bench mark and 71% of actively managed bond funds under-perform.
8. Target Date Funds
- The target date fund is so ubiquitous in retirement savings, that not understanding how they work could be an expensive mistake.
The target date fund seems like simple idea. You choose the date that you expect to retire and you choose a target date fund for that year.
These are favorites of 401(k)’s and they are the default, if not the only option in many 401(k)’s.
And if they have a low expense ratio they are not too bad.
There are pitfalls to watch out for though.
These are set-and-forget portfolios for the managers too, you can even look up the formula for most of them, and they are pretty simple.
What they do is invest aggressively until you get close to retirement and they get conservative so that if there is a crash in the more risky investments you’re protected.
The fees for this should be minimal (like less than 0.1%), but a lot of times they’re not.
The average expense ratio for 2030 target date fund is 0.76% – that’s too high.
It makes the fund ratio of 0.08% for Schwab’s 2030 target fund look pretty good.
9. Exchange Traded Funds (ETF’s)
- If you are looking for information about different mutual funds or an easy way to invest in mutual funds it would be a mistake to over look ETF’s
These mutual funds have a ticker symbol just like a stock.
If you have the ticker symbol or the fund company name and type of fund, you can get all the information you need about the fund philosophy, risk, prospectus, and fees.
And, you can buy ETFs just like you would buy stocks or bonds in a brokerage account.
You can buy all kinds of mutual funds this way. There’s everything from index funds, Vanguards Total Stock Market fund (VTI) to target date funds like Schwab’s 2030 fund (SWYEX).
Remember that there are no ongoing fees with stocks or bonds, but exchange traded funds are mutual funds with management expense ratios that you still have to be aware of.
10. Expense Ratio
- Knowing the expense ratio can help you avoid the mistake to letting mutual fund companies siphon off more of your money than absolutely necessary.
The expense ratio is your cost.
There are two expense ratios that are normally reported: gross expense ratio and the net expense ratio.
Gross is the percentage that the the manager charges to run and manage the fund.
Net is the expense ration that you actually pay. It’s equal to the gross expense ratio, minus the and fee waivers and reimbursements.
Normally the gross and net expense ratios are the same.
You should try to find funds that match your investment goals, with the lowest possible expense ratio.
This is also a great way to check up on your financial advice.
For example, if your advisor recommends an S&P 500 index ETF with an expense ratio of 1.0%, you can google “S&P 500 index funds” and find the iShares Core S&P 500 ETF that has an expense ratio of 0.04%.
11. Fund of Funds (FOF)
- Falling for hidden fees is a mistake, and the FOF is big place that fund companies hide fees.
Retirement savings can be decreased by compounded fees.
A fund of fund of funds is – also known as a multi-manager investment – is a mutual find that is made up of other mutual funds.
This is a pretty insidious way that more money is taken out of your retirement savings.
The Expense Ratio that is reported is only for the first layer – the FOF itself.
The investments in the FOF have unreported expense ratios that you will be paying, and those funds may contain still more funds with still more expenses.
The reason this is so important for retirement savings is that those Target Date Funds that are so popular in 401(k)’s are almost all FOF’s.
To be clear, there are FOF’s like the Schwab 2030 fund that are a reasonably good choice for someone who wants a balanced and diversified retirement savings they do want to think about all the time. You should still know that the fees could be tens of thousands of dollars.
The Takeaway for Your Retirement Savings
Retirement Saving is an important part of your financial future and no matter what age you are it should be one of your top priorities.
You will have to pay some fees along the way, but good financial management and advice is worth paying for.
But by the same token, financial advice and management is not better because you paid more – in fact in most cases the more expensive fees tend to under-perform.
So just be aware of where your money is going – and always remember that it is your money and you have an absolute right to ask questions whenever you need to.