In this post, we will talk about passive investing for retirement. We will explain the main things to consider when planning for retirement.
If you are feeling lazy about reading, I strongly recommend that you watch the video below from John Oliver. In there, all that is discussed in this post is magnificently explained in just twenty minutes. Plus you will laugh a lot!
Retirement Plans, by John Oliver
For those who like reading, let’s crack on with the things to bear in mind.
Strategies to bear in mind when planning passive investing for retirement
One of the main advantages of investing for retirement is to use the retirement plans set by the government, which have great tax advantages. Moreover, you should make the most of any matching programme that your company has. This is something quite common in countries such as the United States.
To give you an example, in the UK, the money you put for retirement (private) is taken from your salary before taxes. For people with low-mid range salaries, your income gets taxed at 20%. Please note that I am simplifying it slightly so you can understand it better. What that means is that if you choose to put £100 a month into retirement, your salary will only be reduced by £80.
We have talked a lot about costs before in this blog. As John Oliver puts it:
Think of fees like termites, they are tiny, they are bearily noticable and they can eat away your fu***** future.
I can’t think of a better metaphor to describe costs!
As described in our posts about costs, over time the costs can dramatically decrease the money you have available for retirement. In John Oliver’s video above, you will find an example of how a 2% annual cost (quite standard) can take 2/3 of your gains. Yes, 2/3! For more examples, read our post about costs!
Active or Passive Funds?
If you have been reading this blog long enough, you already know the answer! John Oliver does give you further evidence in his video above. Go Passive!
The importance of saving
Compound interest is truly amazing. For that reason, you should start saving as soon as possible. Whenever you have got rid of all the debts you have, start saving for retirement even if it is a very tiny amount. Getting started is the most difficult part and once you get used to saving, it will be much easier to increase your contributions. So, even if you can save only $50, start doing it. Your future self will thank you.
If you are not so sure about the importance of saving, please read the book The Millionaire Next Door by Thomas J. Stanley and William D. Danko. That should convince you about the importance of saving.
Egg distribution (asset allocation)
One strategy we have explained previously in this blog. For me, one of the best tools is to simply choose an index fund that gradually switches your investment from stocks to bonds as you grow older. This tool will ensure that you keep your asset allocation in the adequate range and will keep you out of the way in the decision process. Win-win!
I hope you found this post useful and entertaining. Please let me know your thoughts in the comments below!