My wife and I started saving for retirement a couple years ago. We still have a lot of work to do to get to a point where I feel comfortable, but I am years ahead of my peers. As I have started to save for retirement, I have learned a thing or two about retirement. One of the first things that I have learned is that people tend to over-complicate things.
The Wrong Way to Invest
Investors try to learn all of the tricks of the trade in an attempt to increase their returns and get ahead of the game. Everyone dreams of getting ahead. They all think that they have some sort of secret plan or strategy that will let them get ahead. Unfortunately, it doesn’t work that way. What usually happens is that people second guess their investment strategy and sell too soon or too late. They become obsessed and whether they realize it or not, they spend a lot of their time and energy just to manage their retirement fund.
The problem with this extends beyond time involved. The returns are historically lower than the indexes. The question then is why would anyone spend more time to get lower returns? It seems crazy, right?
A Better Approach to Retirement Planning
Instead of obsessing over the smallest changes in the market, my wife and I take a different approach. In fact, there are a couple steps behind my simple retirement plan. The first is to invest extra money. There’s one way to not stress about lower returns and that is to have extra money in the market. Someone who invests $4,000 in the same year that I invest $5,000 would have to make up that $1,000 just in capital gains to come out with more money. That seems almost impossible.
The next part of my plan is to invest in target date retirement funds. I use these to provide an easy process to diversify my portfolio. The fund automatically adjusts with time and I don’t have to worry about it. There is a small management fee, but it is worth it to me as long as the returns stay on par with the index. Many people are against these type of funds and I can understand why. That’s why I supplement my investments with other forms: index funds, a few stocks, real estate (as a limited partner so I don’t have to do any of the work), and much more.
The trick to keep your retirement plan from controlling your life is simple – use the tools that are available to you. Invest aggressively so you don’t have to worry about the things that you can’t control. And last but not least, enjoy the extra time that you have as a result of not stressing about your returns.