Baseball players dream about hitting home runs. Most investors do the same.
Today I’ll tell you how to hit four homers with your retirement savings. Every one leads to a predictable win. In fact, one of them produces three wins all by itself. Together, they can add up to a winning season.
This article is based on the four pieces of advice I most often give to young investors, the actions I believe will have the biggest impact on their financial futures.
Here, I call them the Four Home Runs:
Home Run No. 1: Start saving and investing as early as possible
Even if you have to put off buying a house or a new car, even if you must make only the minimum payments on your student loans, start early.
To see this home run in action, assume you are 25 years old and you can invest $5,000 a year. If you do that for 40 years, until you’re 64, and earn a return of 8%, you’ll wind up with $1,295,000 when you reach the traditional retirement age of 65.
Now imagine that you have a friend who waits until age 35 to start saving $5,000 a year. By age 65, earning the same 8% return, she will have only $566,000.
Here’s where it gets interesting: The difference between your retirement account and your friend’s retirement, $729,000, came exclusively from the $50,000 you invested in the first 10 years, from age 25 to 34.
Although you saved at a constant rate for 40 years, more than half of what you wound up with at age 64 came from your savings in the first 10 years.
And from this single homer, you achieve three “wins.” First, you more than double the nest egg you have at retirement. Second, your retirement income is more than twice as much. Third, your heirs will likely have two to three times as much at the end of your life.
Home Run No. 2: Postpone investing in bond funds until you’re at least 40
The annual return in the last example was based on my assumption that the bond part of your portfolio would gradually increase over time.
If you invest 100% in equities for the first 15 years, I think you can earn 10% annually during that time. If we assume that you earn 8% after that, your nest egg at retirement would be $1,453,000, an increase of $158,000.
Home Run No. 3: Turbocharge your equity portfolio
Do this by adding another nine asset classes that have a long history of outperforming the Standard & Poor’s 500 Index.
These include U.S. large-cap value stocks, U.S. small-cap stocks, U.S. small-cap value stocks, U.S. real estate stocks, international large-cap stocks, international large-cap value stocks, international small-cap stocks, international small-cap value stocks, and emerging markets stocks.
The result: You wind up with $2,030,000 at age 65 — an extra $577,000 without saving another penny.
Home Run No. 4: This could be the play that hits your return right out of the park
Delay your retirement and keep adding to your savings for another five years.
By continuing to add $5,000 a year and leaving your money to grow at 8%, you wind up with a nest egg of $3,012,000 at age 70.
Even if you can’t hit all four home runs, you can still benefit from diversification and delayed retirement.
As they say at the stadium, Let’s play ball!
Richard Buck contributed to this article.