Making Savings For a Comfortable Life in Retirement: Top Tier Tips
The idea of taking a well-deserved rest seems very appealing. You’ll have plenty of free time for books, travelling, and spending time with loved ones. However, to live a truly decent life, you need to build up savings. But how do you do that? With passive income and investments!
Ok, let’s put it straight, everyone decides for themselves how much passive income to retire they need. Also, if you’re used to living on your paycheck alone, and you’ve never run your own business, then investments may seem complicated and mysterious to you. But there are a few simple rules that beginner investors should learn, to avoid disappointment in the initial stages.
- Decide on your investment amount. Theoretically speaking, you can start with any amount. You can buy shares for $200. But it won’t bring any tangible profit. It is recommended to have at least $1-2 thousand for this purpose. Of course, the higher the investment, the more substantial your passive income is.
- Risk and profitability are directly linked. The immutable rule of the stock exchange, and business in general, is the more you risk — the higher the yield. That means the most attractive offers can make you rich quickly or burn your entire budget. So it is important to assess whether you can take such risks and whether your budget can bear such losses.
- Only invest in areas that you know well. A real estate agent knows a lot about this industry. Therefore, it makes more sense for him to deal specifically with residential or commercial properties.
- Make deposits on a regular basis. It will not be enough to invest once. Profits must be reinvested, and then the financial instrument will eventually earn compound interest. This is how even a modest start-up capital turns into a good passive income.
- Diversify your funds into different assets. Ideally, a portfolio should contain real estate, bonds, and equities in equal proportions. Investing only in one financial instrument is too risky.
FIRE — the way of the thriftiest
If you don’t mind living a frugal lifestyle for a long time and constantly limiting your expenses in order to build up savings, then you should familiarise yourself with the FIRE (Financial Independence Retire Early) movement.
Usually, financial experts recommend investing or saving 10-15% of your salary, but this may not be enough in 30-40 years, FIRE followers believe.
It is possible to calculate how much time you need to work in order to have one year off if you save a certain part of your earnings and spend the rest. Assuming that income and expenditure are constant and ignoring the ROI rate, then if you save:
- 10% of your income per month, you have to work for 9 years for each retirement year. The formula looks like this: (1-0,1)/0,1;
- 25% a month, you have to work 3 years for this. (1-0,25)/0,25;
- 50% a month, you should work for 12 months. (1-0,5)/0,5;
- 75%, it’ll take you only four months. (1-0,75)/0,75.
Many members of the movement try to put aside at least 50% of their money per month. They estimate that in 10 years of frugal living they can save for 25-30 years of retirement if they don’t spend more.
One of FIRE’s pioneers is blogger Peter Adeni, known as Mr. Moustache, who has been popularizing the movement since 2011. He was able to retire at the age of 30 but still saves on everything.
The basic rules of the movement
- Earn as much as possible to save as much as possible.
- Put the money in a bank account or invest it to compensate for inflation.
- When you retire, withdraw no more than 4% of your account each year.
Most FIRE participants invest in ETFs, low-cost exchange-traded funds that have lower fees than active funds. The Vanguard funds, for example, charge about 0.06% per annum versus the “regular” 1.5%.
Now let’s sum it up. To save the amount you want, you need to know how to invest. This will protect your capital from inflation and market downturns and allow you to retire even earlier. You’ll need a complex combination of financial instruments: retirement accounts, deposits, stocks, bonds, and ETFs.
And with retirement, the work on investments won’t end but will become even more important. Without external injections, the portfolio must support itself. This means you will have to adapt even better to market volatility, diversify your savings, and count inflation. But the end result in the form of financial independence and a decent pension is definitely worth it!