Once you've reached your golden years, the plan (or hope, anyway), is to spend the rest of your life living off the dividends from your blue chip stocks, the interest income from your bond investments, the rents from the money you've invested in real estate, and other streams of passive income that are popular for retirement funds including annuities that provide guaranteed income for life or intellectual property, such as copyrights, patents, and trademarks.
But retirement fund investing can be fraught with danger. Everyone has heard stories of the diligent saver who was reduced to eating cat food or the retiree who couldn't afford the prescription medications they need to improve quality of life. As an investor, your first concern must be to guard against such fates, protecting what you've build over decades of thoughtful, diligent stewardship. To help you do just that, here are a handful of tips that might help you husband your retirement fund.
Retirement Fund Tip #1: Never Invest Your Retirement Fund Money In Something You Don't Understand
If you don't know the slightest thing about computers, hardware, or software, you have no business owning shares of stock in the semi-conductor sector unless, perhaps, it is part of a broadly diversified low-cost index fund. Likewise, if you don't understand a simple concept such as bond duration, you have no business investing your retirement fund money in bonds without the assistance of a well-qualified financial adviser.
I recently wrote an article building upon this concept that explains the average investor would do well to think like a business owner when it came to managing his or her retirement fund. Take a few moments to read it. You'll be glad you did.
Retirement Fund Tip #2: Never Invest Your Retirement Fund Money In High-Cost Structures
Several years ago, I wrote about one of the world's most prestigious investment banks and wealth management firms that was renowned for its service to ultra-high net worth investors; those with $30 million in net worth or more. I was amazed to see that one of the mutual funds offered by the bank, which held many of the same blue chip stocks as an S&P 500 fund, had an expense ratio that was 12.55x higher than a mostly comparable low-cost offering by a mutual fund company such as Vanguard!
To put it in more direct terms, if you had a portfolio of $500,000, investing in the higher cost fund would take $11,300 out of your pocket in fees each year. Investing in the lower cost fund would take $900 in fees out of your pocket each year. The difference of $10,400 annually is cash that would have been yours but instead goes to the bank for overhead and profit.
Avoiding high-cost structures for your retirement funds also means staying away from mutual fund sales loads and stock brokers that incur large frictional expenses. Every penny you save is not just a penny; it is a penny plus all of the pennies it would have grown into and generated for you over time.
Retirement Fund Tip #3: Maintain Enough Liquidity In Your Retirement Funds to Cover Your Short-Term and Intermediate Financial Needs in the Event of an Emergency
The stock market, as well as any other financial market, may close or be inaccessible for extended periods of time. In 1914, as a result of World War I, the New York Stock Exchange closed on July 31st and didn't reopen fully until mid-December (limited bond trading began on November 28th). That means you wouldn't have been able to buy or sell shares of companies on the exchange regardless of your wealth or power. If you had been relying on your portfolio as a source of liquidity, you might not have been able to pay your bills.
As a general rule, you should consider keeping enough money on hand to feed, clothe, and shelter yourself for at minimum six months in the event of an emergency or economic disruption. Better yet, by the time you reach retirement, endeavor to be like the 1 out of 3 homeowners who own their house outright without a mortgage or the 50% of Americans who have zero credit card debt.
Retirement Fund Tip #4: Remember the Purpose of Your Retirement Fund Money Is to Generate Passive Income. Growth Is a Less Important, Secondary Consideration.
The famous saying holds true: More money has been lost reaching for an extra 1/2 percent of yield than has ever been stolen at the barrel of a gun. As an investor, you need to remember that your accumulation phase, as it is called in finance, is mostly over unless you rank among the top 1% of wealth. That means you need to stop thinking primarily about how to grow your money and start focusing on how to preserve and defend your capital.
You can do this. Successful investing is just as much about avoiding bad decisions and mistakes as it is making good decisions or finding brilliant investments. Compounding is a powerful force that, properly harnessed, can give you the life you desire.
