Here’s some good news…or not…from the Financial Times:
‘The age at which people retire has absolutely no effect on when they die, a joint Australian-Norwegian research project has found.‘
Actually, we think it’s good news.
Your editor is a glass half-full kinda guy.
The report suggests that whenever you retire, odds are you’ll die at your pre-destined age. In other words, if you’re destined to die at 94, then you’ll die at 94 whether you retire at 55, 65 or 75.
The key then is to do all you can now to save for retirement to make sure that you’ve got enough time left up your sleeve to enjoy yourself.
But how on Earth can you do that without taking unnecessary risks?
There’s a fine balance when it comes to saving for retirement.
Remember, you don’t save money for the sake of saving money. There’s no benefit for you if your only goal is to save as much money as possible.
We know that may sound an odd thing to say, given how we’re always banging on about wasteful governments and how folks go into too much debt these days.
But the reality is that ‘saving’ is just another way of saying ‘delaying consumption’. If you spend all your money today then you’re reducing the amount you can consume in the future.
That’s when folks get into trouble during retirement. They haven’t saved enough, so they don’t have the ability to consume.
Turn a 29.9% Gain into a 188% Gain
Therefore it’s important to save. But, it’s possible to take things too far. Some folks forgo all current spending. They live a subsistence level lifestyle and squirrel every last penny away.
You then tend to hear about them in the papers after they die; ‘We were so surprised that Uncle Jack/Auntie Beryl had $5 million in the bank. They scraped by every day.’
Sorry, but that’s no way to live. It’s one thing to think about the future, it’s another thing to be so frugal that you never get around to enjoying the money you’ve saved.
And now, if as reported in the Financial Times, your time on Earth is somewhat pre-determined regardless of how long you work, it makes even more sense to structure your finances so you can build your savings quickly without impacting negatively on your current lifestyle.
So, how can you do that?
Well, there is one simple technique that’s available to most shareholders of blue-chip stocks, and some small-cap stocks too.
It’s a technique that could help you increase the value of your shares by 188% even if the share price only gains 29.9%. That’s more than a six-fold boost to your returns. Here’s how it works…
Warren Buffett Does This
The simple technique involves getting companies that you invest in to give you more shares for ‘free’. It’s something we’ve recommended to Australian Small-Cap Investigator subscribers, as has Nick Hubble to subscribers of his Money for Life Letter.
You may think that sounds like a tough ask. After all, who wants to give anything of value away for free? But surprisingly, it’s pretty easy.
Some of the biggest Australian stocks, including the big banks, retailers, industrials, and even some of the big mining stocks, offer this ‘free’ share service.
All you need to do is know what to look for. But don’t just take our word for it. World famous investor Warren Buffett says this technique has been one of the biggest influences of Berkshire Hathaway’s [NYSE: BRK/A] growth:
‘Our net worth has thus increased from $48 million to $157 billion during those four decades and our intrinsic value has grown far more. No other American corporation has come close to building up its financial strength in this unrelenting way.‘
The technique in question is dividend reinvestment programs (DRPs).
Big companies such as Commonwealth Bank of Australia [ASX: CBA] and Australia & New Zealand Banking Corporation [ASX: ANZ] offer DRPs to shareholders.
The way it works is simple.
A $15,000 Difference on a $10,000 Stake!
Instead of opting to receive a cash dividend payment from the company, you can choose to receive ‘free’ shares. Of course, the shares aren’t really ‘free’ because you’re paying for the shares using the dividend you otherwise would have received.
But buying shares in this way does have benefits. For instance, some companies will offer the shares at a discount to the prevailing market price. Plus, because the company issues the shares to you directly, you don’t have to pay commission to a broker.
Best of all is the impact taking part in a DRP can have on your investments. The two numbers we’ve circled show the difference in the value of a shareholding with a DRP and without a DRP:
That’s a difference of $15,920.95 over 10 years. And as you can see in the green box, each year the number of DRP shares grows as the value of your shares grow and (hopefully) as the dividend grows.
Of course, we’re making the assumption that this is a company with staying power and that it’s able to grow revenue, profits and dividends over the long term.
But that’s why you do your homework, to make sure you’re investing in the type of company that can hit those goals.
Look at the numbers. This is just with a starting point of $10,050 over 10 years. Now imagine you’ve built up a $100,000 over the first 20 years of your investing life and you can now compound your returns using DRPs over the next 20 or 30 years.
It can have a huge impact on your retirement savings. By compounding your returns through a DRP you could hit your retirement goals much sooner…which means retiring earlier and enjoying more of your life.
And providing you don’t need the income from the dividends now (which most people don’t during the accumulation phase of their savings) it won’t have an impact on your daily lifestyle.
Have Your Investing Cake and Eat It Too
As we see it, DRPs are about as close as you can get in the investing world to having your cake and eating it.
A DRP shouldn’t be the sole reason for investing in a stock. But if you’ve done the research on a stock you like and it happens to offer a DRP, run the numbers. It could be that taking part in the DRP is the single best decision you can make to boost your retirement savings pot.
Cheers,
Kris+
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