If your goal is to reach retirement with the biggest pension fund you can then here are 7 things you should adhere to.
1. Don’t waste time
Time is your greatest ally or your worst enemy depending on how you use it and it’s a vital component to your retirement plans.
Investment gurus are known for saying that “Timing the markets doesn’t matter because it’s the time in the markets that really counts”.
Essentially, this means that the earlier you start, the longer you have to invest. And, the longer you have, the more potential you have for compound interest to work its magic.
And that’s the key.
Compound interest needs time to work in your favour but, when it does, your wealth starts to grow. But, if time gets away from you, then it’s your problem that starts growing.
Making time an ally is just a matter of getting started or actively making that increased contribution you’ve been putting off.
Pensions are one of those things that live somewhere in the back of your mind, in the place where they’re easy to ignore, but this tendency just compounds a problem that’s not going away.
Time passes at the same rate for everyone but you have total control over how you use yours.
2. Maximise your tax incentives
There are many things competing for the cash in your pocket every month. But, the thing is, everything you spend money on is after tax money.
If you’re a higher rate taxpayer then that thing that costs €60 means having to earn €100 to pay for it. When you make contributions into a pension fund the whole €100 you earn goes straight in… tax and all.
By making this simple change you transform your disposable income from consumption enabler to wealth builder.
You should make the most of your tax relief each year and you can see exactly how valuable it is for you by getting your instant online quotes on our website.
In addition, any money you put in gets to grow tax free which is incredibly valuable. Your money gets the breathing space it needs to grow by being exempt from income tax, DIRT tax and capital gains.
And as if that wasn’t enough, you also get a portion of your money as tax free cash at retirement which is a nice way to start it.
You can find out exactly what’s on offer for you in 30 seconds by getting your free quotes right here.
3. Invest to beat inflation
Inflation is the silent assassin of wealth. Over a few short years its effects are barely noticeable but with longer timeframes it hits very hard.
Inflation states that the value of €1 today is worth more than the same €1 in a years time.
This is predicated on the notion that its future purchasing power will be less because of the upward trend in prices.
It’s only a problem because people don’t pay much attention to when making investment choices.
This is a big mistake because it’s an incredibly destructive opponent that needs to be tackled head on.
With a 30 year timeframe and inflation of 2.5% you would see the purchasing power of a given sum being cut in half.
For example, €500,000 in 30 years time would have the same purchasing power of €250,000 today.
That’s why it’s so important and it should certainly form part of the discussion around your investment choices.
Losing pace with it is like being on a treadmill because it’s difficult to catch up when you fall behind. But, fear not, we have a number of strategies you can use to counteract it.
4. Understand risk and reward
Ferrari’s and Fiat’s do the same thing in that they can get you from where you are to where you want to go.
Functional similarities aside, they’re very different machines built with very different intentions.
Manufacturers build their cars to match the expectations and preferences of their customers. At one end of the scale you have those designed to be reliable, dependable and cost efficient.
They appeal to those people who want safe, functional modes of transport.
At the opposite end you have models designed for speed.
These are more expensive to manufacture and the emphasis is on performance potential rather than safety.
They appeal to something different but buyers accept the associated risks that go along with them.
Everything else sits in between.
In the world of investing, there exists a vast a range of options that cater to both ends of the consumer spectrum and everything else in the middle.
Some limit your exposure to risk whereas others are inherently built for growth.
The difference between them is the amount of risk on offer for an uncertain level of return so it’s very important that you’re comfortable with the option you choose.
Ultimately, the tradeoff you have to make is between performance and security since you can’t have both at the same time.
This means that your ideal choice strikes a balance between the level of returns you need and the level of risk you’re comfortable with.
But don’t be overly defensive, especially when you have a significant timeframe, because getting a long term average return of 5% means investing the majority of your money in equities.
5. Make good decisions
Good decision making is often cited as the number one predictor of long term investment success.
Emotions and money don’t mix well because emotionally driven decisions lead otherwise rational people to make very irrational choices.
These are incredibly counterproductive because they can have a dramatic impact on the long term value of your pension, especially if it happens more than once.
You can do everything else right only to fall foul of clouded judgement overruling your rational objectivity.
Mistakes like this can be very expensive so impulsive behaviour needs to be kept in check.
That’s why it’s so important to have a competent advisor in your corner with the experience to give you clarity.
We exist to help you make better investment decisions especially when you don’t want to make them.
6. Have a plan
Goal setting is a well proven component to success which you’ve heard many times before I’m sure.
However, they’re quite difficult to set when you don’t have an end result in mind.
That’s the importance of a clear goal because it gives you a target to aim for and a marker which can be used to identify the steps required to reach it.
Since our mission is to make pensions simple, we created a quote portal to help you find a suitable target quickly and easily.
In 30 seconds you can see a realistic range of options in an easy to understand format.
And, if you choose to work towards one, then you’ll be a step ahead of the rest because most pension investors don’t have one.
On a practical level, you also get an added sense of purpose which ensures that you’re not just investing aimlessly.
Once you’re clear about where you’re going, all other decisions can be made within the context of this larger goal.…and it makes it that bit more enjoyable too.
7. Get value for money
“Price is what you pay, value is what you get” – Warren Buffett.
Nobody likes paying charges for anything but, like most things, you get what you pay for. For pensions, the charges you pay are determined by;
- The technical features and benefits of your plan
- The provider you use
- Who you buy it from
Fund managers, investment firms and pension companies charge you to access their platforms. They typically charge you a % of the value of your fund in addition to any setup charges.
This is their incentive to perform consistently because it’s in everyone’s interest for your money to keep growing over time.
That said, charges can have a significant impact on what you end up with. It’s not so bad if you’re getting value but, if you’re not, you should look at making changes quickly.
If you want to start a pension, or would like us to review one you have already, then call me on 01 442 3929 or just send me a quick email to kevin@thepensionstore.ie
Pensions Are Complicated. We’ve Made Them Simple.