Many people try the wrong route to building their retirement wealth, or rebuilding it after a market decline. The wrong way is to look at only a small part of the financial picture instead of the whole picture. Looking at the whole picture can lead you to faster, easier ways to increase retirement security.
The way most people develop a plan to increase their retirement nest eggs is to total the investment assets they have today and project the rate of return they need to reach their goal. Often, that leads people to increasing the risk in their investment portfolio as they search for a big payoff that will put them back on track. Some investors even call this big-game hunting or seeking the next “10-bagger.” A 10-bagger is an investment that increases by at least 10 times the initial investment.
Too much energy and other resources is devoted to this high-risk, high-stress approach to retirement planning.
You don’t have to rely on big gains to increase your financial security. A few people have established financial independence that way, but not many. Most financially-secure people reached that status by pursuing what I call the 2% solution.
Small, simple, low-risk actions can increase the growth rate of your net worth by only two percentage points per year. That means instead of focusing only on your investment portfolio and on your rate of return, focus on your total net worth. Also, focus on the actions that can increase that net worth by 2% annually. Higher investment returns can increase net worth. But so can cutting taxes and reducing out-of-pocket expenses.
Over time, that 2% increase compounds to a big amount. Suppose you start with $10,000 and increase it by 4% annually. After 20 years you’ll have $21,911. But if you increase the growth rate to 6% annually, the 20-year total will be $32,071.
You can achieve that substantial increase with a wide range of small steps, most of which have little or no risk. In addition to increasing investment returns (without taking a lot of risk), you can reduce taxes, improve Medicare coverage and make other shrewd financial decisions. Many people know they are paying too much for certain recurring expenses, but they haven’t taken the time to do something about it.
There’s a reason many businesses now are following the subscription model. In this model, once a customer is sold on a product or service, he or she signs up for an automatic periodic payment, usually monthly. Businesses have found that because the recurring payment is small, most people won’t take action to cancel it after seeing it on their monthly statements. Search your statements for recurring payments you should cancel.
It’s also important to avoid events that can reduce your wealth by significant amounts, such as risky investments, inflated costs, gaps in insurance coverage and more.
When it’s time to accelerate the growth of your nest egg, don’t look first at ways to earn higher investment returns. Look for other actions that in total will increase your net worth by a mere two percentage points each year. There’s a big payoff to that relatively small increase.