So how do you grow your nest egg for retirement in the most strategic way possible? A lot of it is just getting into the market early, choosing the lowest-fee funds possible, and then a lot of watchful waiting.
Invest in Index Funds
Warren Buffett once told LeBron James -- who isn’t exactly hurting for cash -- that his best bet was to invest in index funds.
An index fund is a mutual fund that tracks, or reflects, a specific stock index. So rather than investing in the individual stocks that make up the S&P 500, you’re investing in a fund, a basket of stocks, that mirrors the S&P 500’s changing makeup. Index funds exploit a sort of loophole in the system: On any timetable longer than three years, the overall market tends to outperform individual stocks. So index funds aren’t the best idea to save up for a new car next year, but they work really well when saving for retirement.
Keep Your Fees Under 1 Percent
Anything over 1 percent in terms of fees is way too high and it’s going to cut deep into your overall retirement nest egg. While 1 percent doesn’t sound like much, it takes a chunk out of your retirement savings over time, to the tune of tens or hundreds of thousands of dollars. In the digital age, it’s just not necessary. You can easily invest in exchange-traded funds, index funds and other mutual funds for less than half that. That’s going to add up to big money in your pocket over the long term.
Don’t Put All Your Eggs in One Basket
It sounds rudimentary, but it needs to be said. Too many investors think they’re diversified just because they invest in mutual funds and index funds -- or because they are exposed to several different kinds of equity.
In fact, mutual funds, index funds and even ETFs can be horribly under-diversified. If all your money is invested in the energy sector, what happens to your nest egg when the price of gas goes down? Or if you’re all in on tech stocks, what happens when the next bubble bursts? You’re going to lose a lot of your savings and without anything balancing it out. You should be invested across several sectors -- and asset classes like bonds! -- so that your earnings can be reinvested in the most tax advantaged way possible. This is easier than ever thanks to algorithms that do all the hard work for you.
Don’t Forget Taxes
You have to account for taxes when you’re figuring out any kind of investment strategy. Buying, selling and reinvesting is the way to go when it comes to saving for your retirement.
But you have to do this in the most tax-efficient manner possible. That used to be a Byzantine procedure that even the best investment advisors had difficulty with. Today, it’s easy, because software can help. The same algorithms that balance your stock portfolio can lighten your tax burden.
All of this boils down to one simple fact: Saving for retirement is easier than ever. If you can get the money together to invest early and well, you can live a comfortable retirement.