With a title like that, I’d better deliver big, right?! Are you ready for the secret to earning lots and lots of big money on your retirement accounts? Here it is: diligence.
Before you stomp away mad and never come back, give me a chance to explain. People like Dave Ramsey are always touting the possibility of making 10-12% on investments while others say that’s impossible. Here’s what history and even my own experience say.
Interest rates on a savings account, CD, money market or other “safe” types of accounts are pretty pathetic. At the same time, I think it is fair for a financial coach (including myself) to use the 10% number as an estimate because it is very possible to earn 10% and MUCH more. It boils down to saving with your end purpose in mind. If your goal is an emergency fund (you do have one of those, right?) then you’re not so worried about making a lot of interest income; you want to be sure that money is there if there is an emergency. So…you won’t want to take any big risks with that money, would you?
We have our emergency fund in a money market account, earning about 1% right now. That’s a sad return, but pretty safe. Likewise with our other short-term savings – we have a basic savings account earning about 0.80%. However, we also have some long-term savings for our kids’ college and for retirement. I’m not so worried about taking a little risk with these because history bears out that, over the long haul, they will make a much better return. With all that has happened in the past few years with our economy, let me share with you the average return (percentage) on our 529 college savings accounts and our Roth IRAs.
2008 = 18.5% loss for the year
2009 = 20.71% gain for the year
2010 = 9.34% gain for the year
2011 = 3.02% loss for the year
2012 = 14.21% gain for the year
2013 = 23.92% gain for the year
2014 = 5.61% gain for the year (so far)
As you can see, I’m making decent money in the market, even looking at these few years. 2008 was a HORRIBLE year for the markets and so I winced as I reviewed my statement. But that’s also why I included it in there, so you could see how badly the market can perform some years. However, look at what has happened as the markets have started to recover. These returns are purely in my long-term investments, which are made up mostly of mutual funds focused on growth, income and international funds. I do not buy single stocks nor am I a big risk-taker. So…is 10% possible? ABSOLUTELY! Is 10% likely in a savings account? No…unless you want to see 15% mortgage and auto loan rates.
Now, back to my explanation on diligence. When do I invest in the market? Every month. I’m consistent. Do I try to time the market? Almost never. Can I predict the market? Almost never. So if I want to make the most of my long-term market opportunities, I (and you) need to be diligent and consistent in our habit (yes, I used that word on purpose) of saving for retirement. Every payday, something should be set aside. It’s really that simple. You will gain and lose in the market (short term) but the overall trajectory is UP! Look at any stock graph showing the history of the market and you’ll find the trajectory is clearly in a positive direction.
So how do you make big money on your retirement? Start putting away money for retirement this payday, and every payday until you retire. We’ll save the discussion of where to put it for a later time.
I am not an investment advisor, but if you’d like some 1-on-1 help with how to look at some of this stuff, feel free to contact me.