This week is Retirement Week in Money Morning.
Each day we’ll present advice and insight on planning and saving for retirement. This will include actionable information for anyone, regardless of age, proximity to retirement or current financial position.
The highlight will be a genuine live conference call on Thursday afternoon hosted by your editor, featuring Greg Canavan and Vern Gowdie. The conference call is now fully booked. But based on the amount of interest, we’re certain we’ll organise another event like this soon.
But so you don’t miss out we’ll do our best to offer you the next best thing in this week’s Money Morning. So today we’ll give you our take on the single biggest problem you face as you head towards retirement…
Saving for retirement is a big deal. Although it really shouldn’t be.
After all, it’s not as though you’ve only got one crack at it ‘a minute before midnight’.
If you’re like most people, you have (or had) 40-45 years to plan for retirement. Of course, the longer it takes you to get your plan right the less time you’ve got to benefit from it.
The last thing you want is to get to retirement age only to realise you need to keep working. Or worse, that you’ll need to rely on the government to provide you with a retirement income.
Capital Growth and Dividend Growth
That’s why – within reason – it makes sense to begin saving for retirement as early as you can. Not that we suggest you start hoarding cash the minute you leave school and get your first job.
It’s OK to have some fun first.
But by the time you hit your 30′s, then we’d say that is when you should start taking retirement savings a bit more seriously.
The question is, where should you start?
As we try to explain in these daily letters, the single best way to build wealth is to invest in growing businesses. If you can’t or don’t want to invest in a growing business then you should invest in businesses with a stable outlook that can pay a portion of their profits to you (dividends).
But even there, it’s so much better if the dividend paying company can grow its business so that over time it can pay you a gradually rising income.
So there you go. There’s your retirement plan. Invest in growing businesses, preferably businesses that can pay you a percentage of their profits.
Easy. What are you waiting for?
If only it really was that easy. Trouble is, investing isn’t just about reward. There’s that small matter of risk too…
RBA Backs Aussie Investors into a Corner
Risk is the biggest problem for investors. Or to put it another way, it’s the fear of losing money.
Everyone can understand that emotion. It’s especially understandable in the current environment. A lot of people lost a lot of money in 2008 after piling into the bull market that ended in 2007.
Many investors thought that after the 2001 crash, the market couldn’t possibly crash again. And besides, wasn’t China the new saviour? As long as China kept buying Australia’s resources there was no way Australian stocks could fall.
And of course, Australia was the ‘lucky country’.
Anyway, you remember how that turned out.
For those investors who lived through two stock market crashes in the space of eight years, we get that they’re nervous about taking the plunge into stocks. But the truth is, with interest rates at a record low, the Reserve Bank of Australia has backed investors into a corner.
To the extent that you have no option but to take risks in some form or another.
(By the way, Money for Life Letter editor Nick Hubble shares his view on risk – specifically price risk – below. Make sure to check it out. Plus, you can read more of Nick’s thoughts on investing in the current climate, including five simple ways to boost your savings here.)
Who Doesn’t Want to Buy Cheap Stocks?
And yet many investors are still sitting things out. They’re waiting for the inevitable crash. They believe that when the market crashes within the next couple of years they’ll get the chance to buy stocks on the cheap.
We’re not saying it’s an unreasonable approach. It’s just fine. Who doesn’t want to avoid a crash? Who doesn’t want to buy stocks cheap?
Our reservation is that there’s no guarantee stocks will crash by 50% or more this year, next year, in five years or even in 20 years.
Remember the chart we showed you a few weeks ago. It was a chart of US price inflation since 1947:
Source: Federal Reserve Bank of St Louis
This is what central banks have achieved with inflation – a gradual but persistent rise. This is what they now want to achieve with asset prices.
Even though they have caused huge instability and volatility in recent years, that isn’t their goal. Their goal is to manage and manipulate stock prices in a gradually rising pattern.
Whether they will ever achieve that goal is another question.
But what we do know is that they’ll try. And you know what that means? That’s right, years and perhaps decades of low interest rates and money printing.
It may not result in stocks going up in a straight line. But our bet is you’ll see stocks rise for at least the next two years as more and more investors succumb to reality. The reality is that if you want to grow your wealth for retirement you can’t do it by not taking risks. That means buying stocks.
In short, the market is risky. That’s a fact you’ve got to accept if you want any chance of building up a retirement nest egg.
We’ll have more to say on this tomorrow, including simple strategies for managing risk in an uncertain market.
Until then, make sure to check out Nick Hubble’s views on risk in today’s other article.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: UNAVOIDABLE: Australia’s First Recession in 22 Years
