If you’re relatively young like me, then it might seem silly to begin thinking about retirement. But if you ask most baby boomers today, they’ll probably tell you that it’s a good idea, because chances are you’ll be asking a baby boomer who didn’t and is consequently unprepared.
As a young person, it may seem like you have time before you need to worry about these things, and you’d rather take the money you would have put away for retirement and spend it on something fun. But as I’m about to show you, preparing for retirement while you’re young is crucial to saving up enough money to retire the way you want to, and 40 years from now you will have wished that you had taken these steps in order to prepare for your future.
1. Put money away regularly and start now
This is so easy that it is easy to forget to do it. But even putting away $100 per week can make a huge difference. Don’t believe me? Consider that if you put away $100 per week for a year and then generate an average annual 8% return for 40 years, this $5,000 becomes over $100,000! With this in mind, it is clear that the early years are the most important in building long-term wealth that can support you when you’re too old to work or too old to want to work. If you start late, then you miss out on most of the benefits of the long-term power of compounding, and you have to save 3-5 times as much.
2. Do a lot of research
You probably think that you have a job and that you can take some money and put it away for retirement. But managing your money is just as important as your “regular” job, and it is possibly more important. Suppose you do no work and put away the same $5,000 for 40 years. Since you did no work, you only generate a 5% return on your money. That $5,000 grows into $35,000. Not too shabby. But if you research your investments and are able to generate a 12% annual return over the same 40 years, you end up with $465,000. That extra work is worth $430,000!
Chances are if you’re young, you’re not making that kind of money, but if you’re working to make your money work for you then you can generate that sort of wealth! You won’t notice a huge difference immediately, but those extra few hours a week of researching your investments can mean the difference between saving a few hundred thousand for retirement by the time you’re 65 and retiring a multi-millionaire when you’re 50.
3. Take calculated risks and be a contrarian
The most successful people take risks. If they succeed, they get ahead, and if they fail, they learn something for next time. As a young investor, you can afford to make mistakes now, and making them will make you a better investor going forward. Now when I say to take calculated risks you need to make sure that the potential reward justifies the risk. This often means being a contrarian and buying assets that everybody hates. Which assets does this encompass? There are certainly a lot that are down and out now, but what it doesn’t include are probably assets that you feel comfortable in such as “blue chip” stocks and bonds.
On the other hand, there are potentially incredible opportunities in assets that people hate such as Russian stocks, Argentinian stocks, coal stocks, and so on. We all know the narratives that keep people out of these last three assets, but at the same time the fact that the public has no interest in these assets means that the risks are priced in and then some.
When you’re thinking about generating long-term gains that can make you a lot of money, you need to consider owning assets that make you uncomfortable.
4. Learn from your mistakes
If you spend a great deal of your time investing, then you are going to make mistakes. Mistakes will lose you money but you get experience in return. If you learn from this experience, you will make fewer or less costly mistakes in the future when you can’t afford to make them. If you’re young, you can afford to lose some money here or there because you have plenty of time to make it back. But make sure you don’t lose that money for nothing. If you don’t learn from your mistakes, you will lose money when you can’t afford to lose it, and you can potentially get into a lot of trouble.