Opinion: Saving for Retirement? Here are four key lessons

If you are saving money for retirement, there are four important lessons I hope you will learn. I’ll back them up with some numbers. These may not be new, but they will be crucial to your success. Lesson 1: When you start saving, the amount you invest will make more of a difference than your investment choice. (This assumes that you are not trying to risk individual stocks or commodities.)

After 10 years of consistent savings, most of the dollars in your account will likely be dollars you put in, not dollars you earned. But if you let this lesson discourage you, you are flirting with failure. Long-term investing only works if you continue. Lesson 2: Like it or not, luck will play a big part in your success. This applies to both good luck and bad luck. If you start saving money near the start of a strong bull market, you will feel safe. But if the market falls into a painful dip just when it is starting, a bear market can make investing look pretty stupid. (Hint: it isn’t). Lesson 3: In the long run, your investment choice has a huge impact on your ultimate success. The good news is that we know a lot about what worked well in the past. The bad news is that we don’t know anything about what will work well in the future. Lesson 4: Despite all that, there is a sure way to do better when saving for retirement: Save more. I’ll show you some numbers based on assumptions that someone saves $ 1,000 a year. In all cases, if you saved $ 1,500 a year, you would have half again in the future. If you can do this for 30 or 40 years, depending on how much you save, your investment choices, and that all-important luck factor, that extra 50% could add millions of dollars to what you have when you retire. The numbers that I am going to quote are from some tables available on my website. They show actual annual returns and results from 1970 to 2020 for portfolios with various combinations of stocks and bonds. They all assume that an investor added $ 1,000 a year ($ 83.33 a month) in 1970, then increased the contribution by 3% each year to cover the alleged inflation. Let’s go back to Lesson 1. As you can see from Table 73, if all of your monthly investments went to the S&P 500 SPX, + 0.15% in 1970, you ended the year with $ 1022. That $ 22 profit was not very impressive! If you continued that plan for 10 years, your contributions totaled $ 11,465. At the end of 1979, his account was worth $ 16,270. Did that make you feel like you were on your way to becoming a millionaire? Probably not. Most of that year-end balance, about 70 cents on the dollar, came out of his own pocket. In the second decade of his plan, he added an additional $ 15,408. Your year-end balance in 1989 was $ 120,320, giving you a gigantic reward for sticking with the plan. Of that total, only $ 26,873, or about 22 cents, came from you. The rest was what you earned. Fast forward another 10 years, he ended 1999 with $ 703,515. His total contributions at that time were $ 47,599, or 6.8 cents on the dollar. This shows the value of being patient and continuing to add to your account. In other columns of the table, you will see the results for portfolios that were less focused on stocks. And of course you can follow the numbers another 21 years until 2020. Let’s review Lesson 2, the importance of luck. In the 1990s, the value of his portfolio increased from $ 120,320 to $ 703,515. His own contributions accounted for just $ 20,726 of that $ 583,195 increase in value. That was Lady Luck at work, as the last half of the 1990s included a roaring bull market for the S&P 500. But luck, this time bad luck, played a big role in the decade that followed, with two markets. brutal bears that fueled many investors. off the market. Assuming you continued to contribute monthly according to plan, you added another $ 27,825. However, his portfolio ended 2009 with a value of only $ 668,733. Although it was a surprising loss, for more than three decades his portfolio did very well. To illustrate Lesson 3, I suggest you scroll down to Table 76a, where you will see year-by-year results for investing in the four asset classes of the combined portfolio of four global funds that I described in a recent article. Based on the exact same contributions of $ 1,000 per year, this four-fund strategy would have resulted in a balance of $ 25,611 after 10 years (vs. $ 16,270 on the S&P 500) and $ 254,317 after 20 years (vs. $ 120,320 ). The huge bull market in US stocks in the 1990s greatly favored the S&P 500, which ended 1999 at $ 703,315 after 30 years of investment. But the four-fund combination was still ahead at the time, worth $ 724,586. Diversified strategy really flourished in the first decade of this century, ending 2009 with a value of $ 1.35 million, twice the value of the S&P 500. An additional lesson: you never know what will come next. That’s one of the reasons diversification is so valuable. And why do you “know” less than you think about the future. Still, although we cannot know what is on the horizon, in the long term the market has always come back and has resumed an uptrend. Will that continue? There is no way to know for sure. But there is also no viable long-term alternative that I know of. If you apply these four lessons, your chances of long-term success are high. For more ideas on saving for retirement, check out my podcast. I also invite you to virtually attend one or more of the four live events to be held this month in the Financial Education Series sponsored by the Bainbridge Community Foundation. Richard Buck contributed to this article. Paul Merriman and Richard Buck are the authors of We’re Talking Millions! 12 Simple Ways To Boost Your Retirement.