When it comes to saving and investing for the future, there are several important considerations to keep in mind if your intention is to build long-term wealth that will allow you to support yourself and your family throughout your retirement years, and leave a legacy behind to those you care about.

First of all, it is important to understand the difference between saving and investing. While the word “savings” has often been commonly used to describe any place that you are putting money for retirement, it is essential to understand that putting money into a market-based vehicle like a 401k or IRA is actually investing, not saving.

An easy way to understand the difference is to think of “saving” as something that you do with money that you want to keep “safe,” while “investing” is what you do with money that you can afford to lose, in hopes of receiving a potential return on your investment (ROI) in the future. Or, to put it another way, investing is done in order to earn a return ON your money, while saving is done to ensure a return OF your money.

Please keep in mind that neither of these approaches is wrong, and in fact, both are necessary parts of a well-designed financial plan. However, it is essential to understand these differences as you design your long-term wealth building strategy. Intending to rely on retirement “savings” that are actually investments can lead to a world of hurt when it comes time to retire if the market doesn’t cooperate in the manner that you had expected.

With this distinction firmly in mind, let’s take a look at 5 tips for investing and saving smartly for building long-term wealth:

1. Start Early

Ever since the discovery of compound interest, it has been widely accepted that the earlier you can start saving or investing, the more money you should have in your later years. Even if you are only able to save a small amount on a regular basis (see Tip #2), it can add up to a substantial amount over 35-40 years of your working life. We can all come up with excuses for waiting to start saving – “I’ll save when I have a higher-paying job,” “I have too many bills right now and can’t afford to save,” “I just had a big unexpected expense,” etc. But the truth is, there will ALWAYS be a reason to wait, and if we keep putting it off, we will end up like the millions of Americans who are now 10-15 years from retirement and only have 1-2 years’ worth of their working salary saved for retirement.¹

Starting early also gives you the flexibility to save or invest with less risk. Not only will you have more time to make up any potential losses, but you also won’t have the pressure of needing to get huge returns to make up for all those years when you didn’t save. This means you’ll be able to build a more properly diversified investment and savings strategy that lowers your risk while taking advantage of potential growth opportunities (see Tip #3).

It’s never too late to start saving, but the earlier you start, the better chance you’ll have of building long-term wealth! Make a commitment to start saving today – starting with whatever you can – and do it faithfully and regularly... Which leads us to tip #2:

2. Save Regularly

Of all the ways to build long-term wealth, these first 2 are the most important. Making a commitment to save more is great, but if you only do it once in a while when you get a bonus or pay off a debt, it won’t have as great an impact over time. Saving unexpected windfalls is a very smart thing to do – but you also need to make it a habit to save on a regular basis.

The easiest way to do this is to create an automated savings rule. This can mean setting up an automatic transfer in your bank account to transfer money to a savings account every month, having your employer take automated payroll deductions into a retirement account, or setting up a Bank-On-Yourself-type plan, where you pay a monthly premium into a tax-advantaged vehicle where you have access and liquidity along with protection from market volatility.*

3. Diversify Your Strategy

When most people think of financial diversification, they often think of having a “diversified” portfolio of stocks, bonds, and mutual funds. However, a TRULY diversified financial plan should contain different “buckets” or types of assets in different risk classes – some for growth, others for protection and liquidity, some that provide tax-deferred growth, and others that will offer tax-free income in your retirement years. As you draw closer to your retirement years, you may also want to consider adding some assets that will provide a source of guaranteed income that will last throughout your lifetime.

Most Americans simply put money into a 401k every year – which is a great start as it keeps you consistently investing for the future – but it lacks many of the benefits provided by other financial vehicles such as liquidity and access to your money, protection from market volatility, or tax-free growth and tax-free distributions.

It is important to do your research and take the time to learn about and implement other financial strategies which may offer some of these other features if they are important to you.

4. Avoid Shiny Object Syndrome

In investing, the “buy-and-hold” strategy has long been known to be the most efficient way to invest for the long term. However, this is often easier said than done! Human nature interferes, and Dalbar Reports has found that the average mutual fund investor has only outperformed inflation by 1.71% over the past 20 years it comes to actual results.²

Beware of chasing every new investment or financial strategy that you come across. If you commit to the 3 steps above and do them correctly and consistently, you can trust that your financial plan will do what you need it to. This does not mean that you shouldn’t adjust your portfolio from time to time. It is a good idea to review your assets with a qualified financial professional every so often and make sure your plan is on track. Things can change over time, and especially as you draw closer to your retirement years, it is important to keep an eye on the end goal. You may want to shift some assets into safer vehicles that offer less risk as you enter the Preservation Phase of the Money Cycle, for example. A good retirement strategist can be an invaluable help with this type of planning.

5. Work with a Financial Professional Well-Versed in Holistic Planning

Many people overlook the importance of this step, and assume that because they have a financial advisor who has helped them manage their investment portfolio over the years, they will be all set for retirement. However, if your financial portfolio is not properly risk diversified (see Tip #3 above), you may be in for an unpleasant surprise when retirement finally arrives.

A couple of key considerations in making sure you are properly positioned for retirement include sequence of returns risk and taxes. If all of your money is in market-based investments and the market takes a dive at the wrong time (e.g. while taking retirement income), you could end up in a financial hole that you’ll never be able to climb out of, and your money may not last nearly as long as you had expected.

And don’t forget Uncle Sam! If you have all of your retirement savings in tax-deferred vehicles, a big chunk of “your” retirement money is not really yours, and at some point, you will have to pay the piper. 

Working with a CPA and a knowledgeable financial professional can help you learn about your options for mitigating the impact of taxes during retirement. Planning for this properly in advance and understanding the strategies available to you can help you minimize taxes on both your retirement income and your Social Security benefits.

A good holistic planner should also help you design a plan that will not only build long-term wealth, but make sure that that wealth will last at least as long as you do. If your current advisor has not designed a true distribution plan for you that shows you:

• how much money you will have in retirement
• how much you will be able to withdraw every year to live on
• which assets to pull from first, and
• how long your money will last

it may be time to seek a second opinion!

The Bottom Line

Sometimes the simplest methods are the most powerful, and this is certainly the case with financial planning. When it comes to designing a solid financial plan, following the simple tips above will go a long way towards helping you build long-term wealth that will last for your lifetime and beyond. If you can simply stick to these 5 principles, you will set yourself on a path to financial abundance that will support your retirement dreams, and allow you to leave a legacy to those you care most about.

We understand that these simple principles are often easier said than done. If you would like some guidance with implementing these steps in your own life, please contact our office for a free initial strategy session. We look forward to helping you design a plan that supports your long-term wealth-building goals!

Sources:

1.) https://www.investopedia.com/articles/personal-finance/010616/whats-average-401k-balance-age.asp

2.)  https://www.bankonyourself.com/dalbar-2019-poor-investor-performance-continues.html

Disclosures:

* Bank On Yourself is an insurance-based strategy and all guarantees are based on the claims-paying ability of the insurance company. Dividends are not guaranteed. Excess policy loans can result in termination of a policy. A policy that lapses or is surrendered can potentially result in tax consequences. If your policy is not designed and used correctly, it may lose any or all of the benefits described. Purchasing a Bank On Yourself policy should only be done under the guidance of a qualified Bank On Yourself Professional who has been trained in the proper design and usage of these types of policies.

The information presented here is for educational purposes only and is not a solicitation for the purchase of any insurance or financial product. This information has been provided by a Licensed Insurance Professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.