A million dollars. For many, it’s an amount that conjures up thoughts of a lavish lifestyle, a comfortable retirement, and even the means to leave a legacy to one’s heirs. Indeed, a million dollars is a lot of money. In fact, $1 million in dollar bills weighs about a ton, and if one were to count that million one dollar at a time, it would take about 12 days of non-stop counting!1
While a million dollars sounds like a lot, in reality, it may or may not be enough to live comfortably in retirement. Whether a million is enough hinges on a variety of variables including one’s life expectancy, future housing costs, the cost of living where one chooses to retire, and the future cost of healthcare. As well, how one plans to spend their days in retirement is also a key determinant in how much one will need to save. Those looking to travel to unique and exotic vacation destinations will require much more in savings, while those choosing to spend their days close to home with friends and family will, in all likelihood, require less.
Regardless of whether one sets their retirement savings goal at $1 million, $2 million, or maybe even more, there are some tried and true strategies to help you get to the level of savings you need for the kind of retirement that you’ve imagined.
Watch your expenses – big and small.
As the old adage goes, “Watch the pennies and the dollars will take care of themselves.” When trying to build wealth, exercising care in how one spends one’s money on both big and small purchases can go a long way toward financial success. For example, a daily cup of coffee from the local gourmet coffee shop may cost around $3. Add in another $8 for lunch from a favorite sandwich shop, and the total expenditure is $11 a day, or $55 per week. Over the course of a year, coffee and lunch could end up costing $2,700 or more; money that one could be saving for the future instead.
Similarly, when it comes to larger purchases, such as a car, buyers must weigh the desire and benefits of purchasing a high-end luxury car vs. a more inexpensive vehicle, as well as purchasing new or used. Obviously, a new vehicle with all the latest bells and whistles may seem appealing, but a more inexpensive car will still solve the need for reliable transportation while potentially leaving funds available to put toward retirement.
Save as much as you can, as early as you can.
Few would argue that one of the most important factors in building wealth is to begin saving early in life, and to save as much as possible. Perhaps one of the easiest and most effective ways to save is through an employer sponsored retirement plan, such as a 401(k) plan. When participating in these types of plans, contributions are made through payroll deductions, thereby making saving easy, and automatic. Furthermore, since contributions are typically made with pre-tax dollars, participating in the plan will help lower the employee’s current taxable income, while the tax-deferred nature of these accounts allows for growth over time that is unimpeded by taxes.
While 401(k) plans allow for employee contributions of up to $18,000 in 2017, with those age 50 or older eligible for an additional “catch-up” contribution of $6,000,2 these amounts may be unrealistic for some savers. What is important, however, is to ensure that one is saving as much as he or she can afford, and to contribute at least enough to qualify for any employer matching contributions that may be available; to do otherwise is essentially leaving free money on the table.
Choose investments wisely.
While some may gravitate toward investments that seek to minimize risk, those who are too conservative expose themselves to a very different type of risk: the risk that their portfolio will fail to keep pace with the rate of inflation over time. Historically, equity investments have provided investors with an opportunity to keep pace with or exceed the rate of inflation, but they also tend to have greater volatility compared to bonds or cash equivalents. As such, we believe investors will be best served by holding a broadly diversified portfolio that is global in its reach, while balancing the equity exposure with an allocation to fixed income based on each investor’s goals, time horizon and risk tolerance.
Whereas diversification by geography and asset class are essential, we also believe that diversification by “factors” is imperative as well. The elemental sources of risk premiums and expected returns, academically derived equity factors include value, quality, momentum, size and low volatility, while within fixed income, investors can target the return premia associated with, among others, interest rate risk, and credit risk.* Given it’s nearly impossible to predict if and when a given factor will contribute positively to a portfolio’s return, by diversifying across multiple factors, investors have the opportunity to capture some of the return potential of those factors that are currently in favor, without being overly exposed to those that may be detracting from the portfolio’s return.
Lastly, pay close attention to the expenses associated with the investments in your portfolio. By choosing low cost investment options, you’ll be paying less in expenses thereby keeping more in your portfolio that can potentially grow over time.
Be cognizant of your emotions and behavior.
There’s little doubt that when it comes to their finances, people often allow their emotions, intuitions or biases to overrule logical thought. In doing so, they may be making decisions that on the surface seem “right,” but when examined more closely, they may actually be detrimental to their well-being.
For example, loss aversion seems to be a natural tendency shared by a great many people. Given their fear of loss, many investors may be tempted to sell their investments during times of volatility, and for some, they may sell only after their portfolio has incurred a loss. Unfortunately, by selling, they will be turning what was previously only a loss on paper into an actual, realized loss. But that’s only half the problem; the other half is knowing when to get back into the markets. Often, investors will only wade back in once a recovery is underway – and for some, well under way. Unfortunately, these investors will have missed the beginning of the next market advance, and the portion of the rally that they’ve missed could have been quite substantial.
The first step in avoiding the temptation to follow emotion is, perhaps, the recognition of such as a human tendency. If we can understand how and when we might be prone to act irrationally, we may be better equipped to avoid the temptation, and instead, apply critical and reasoned thinking to our decisions, actions and behaviors.
We’re here to help.
If you’re interested in reviewing your progress toward reaching your retirement savings goal, please contact me. Together, we can determine if your goal remains consistent with the lifestyle you envision in the future. Additionally, we can review your investment strategies and suggest changes, as necessary, in order to provide you with the greatest chance of achieving success.
*Symmetry Partners’ investment approach seeks enhanced returns by overweighting assets that exhibit characteristics that tend to be in accordance with one or more “factors” identified in academic research as historically associated with higher returns. The factors Symmetry seeks to capture may change over time at its discretion. Please be advised that adding these factors may not ensure increased return over a market weighted investment and may lead to underperformance relative to the benchmark over the investor’s time horizon.
Diversification seeks to reduce volatility by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market. Rebalancing assets can have tax consequences. If you sell assets in a taxable account you may have to pay tax on any gain resulting from the sale. Please consult your tax advisor.
Content written by Symmetry Partners, LLC. Our firm utilizes Symmetry Partners, LLC for investment management services. Symmetry Partners, LLC, is an investment adviser registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. All data is from sources believed to be reliable, but cannot be guaranteed or warranted. No current or prospective client should assume that future performance of any specific investment, investment strategy, product, or non-investment related content made reference to directly or indirectly in this article will be profitable. As with any investment strategy, there is a possibility of profitability as well as loss. Please note that you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Symmetry Partners or your advisor. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.