5 Ways To Supercharge Your Pension
A pension is a form of investment which pays you an income in retirement. Saving and investing from your salary over a working life takes patience and discipline. These are not popular words in a society focused on instant gratification. However short of winning the lottery, this is the only way to achieve your goals. Here are five ways to supercharge your pension:
The compounding effect of returns is a very powerful tool in the kitbag of any investor. The younger you start the greater the benefit.
For example, investing $1,000 per month for 40 years [a typical working lifetime] at 5% return would be a total investment of $480,000 (1000 x 12 x 40). The value at the end of 40 years would be $1,526,000.
If the same person waited 20 years before they started to invest but doubled their investment to $2,000 per month for 20 years they would have invested the same amount ($480,000). But the value on maturity would be only $822,000.
The person who started earlier has a pension which is 85% bigger for no additional capital outlay.
Track the Charges On Your Pension
Cheapest is not always best. You should take care of what charges are being taken for the running of your retirement account. Insist on knowing all the charges and having them explained to you before you commit. Do not get locked into long term contracts.
Financial Services is a dynamic and competitive market. Whilst you may be saving for your whole working life you will probably find better, more suitable products along the way than that which you start with.
Transparency in financial services is improving but still has a long way to go. Make sure you only pay for what you need. If you don’t need to trade on 20 exchanges, make sure you are not paying for a facility you will not use. Equally, if you do not need advice, make sure there is an option to have the cost of financial advice removed. Many funds charge more than 2% per annum. Others with equally good past performance and future prospects have charges below 1% per annum.
Because investment is a long term process the compounding effects of even these small differences in the fee can be very large in the end. For example, if a plane left Europe crossing the Atlantic and was just 1 degree off course, it would miss the target airport by many miles. Investment is the same. A 1% difference over 20 years can compound into tens of thousands of dollars with no additional discernable benefit.
Get Someone Else to Pay For Your Pension
This could be your employer matching contributions to a pension scheme, tax relief or a tenant paying the mortgage on your investment property. This is a great way to give your pension an extra boost.
Save First and then Spend
This idea is attributed to Warren Buffett one of the most successful investors of all time and one of the world’s richest men. For a multi-Billionaire, he lives very modestly saving first then spending. Most people spend then try and save what is left. Often there is more month than there is salary and so inevitably very little gets saved. By turning the normal behaviour around, savings is done at the beginning of the month and over time will build into something meaningful.
Avoid Get Rich Quick Schemes
I know they are attractive and a sure thing. The reality is they are usually very far from a sure thing. Often returns will probably not be anything like those promised. Becoming wealthy is a long road that requires commitment and hard work. After all, if it was easy, everyone would be wealthy.
Investment is about balancing and managing risk. There are two parties to any transaction. Those with the money (you) and those who want the money (them).
They do not want to pay more for the money than they need to. Otherwise, the project they want the money for will not be profitable enough to justify the time and effort they will expend in doing it.
You will assess the return not just in terms of the amount of return but also the risk to your capital. Therefore, all things being equal if 2 investments have the same rate of return you will choose the one with the lowest risk. This is one of the key tenets of investment management. If you are being offered a ‘guaranteed’ investment with an above-average return, remember there is no such thing as a free lunch. You just have not spotted the risk yet.
That’s it 5 ways to supercharge your pension. Contact me if you have any questions.