There's good news for everyday Australians saving for their retirement. The long and often arduous journey to build your nest egg can be dramatically shortened by picking up the habits of successful investors.
I'm not talking about the mega-rich here. It would be great to be like Warren Buffett or even a successful businessman like our former Prime Minister Malcom Turnbull, but most of us mere mortals are unlikely to ever reach such financial status on our own steam unless we win the lotto or inherit the wealth.
I don't know about you, but I know I'm not "lottery-lucky" and my relatives don't like me enough. This means I desperately need an alternative retirement strategy.
Not mega-rich, but rich-enough
If you are somewhat in the same boat, you can at least take some comfort from knowing that you don't need several millions to retire comfortable as a couple of million is likely to be sufficient to maintain a middle-class lifestyle.
It's not as hard as you might think to get that amount in your superannuation before your golden years as many ordinary Australians have managed to achieve that goal before they turn 65.
There have been several books and articles written over the years about how successful savers have achieved financial independence in their latter years and there are three that stands out for me.
Three habits of successful retirees
Its perhaps more by coincidence than design that I find that I've followed similar behaviours. While I am not rich enough to completely stop working (at least not yet but I'm still reasonably young), I can confidently say that my wife and I won't be huddled around a can of baked beans over dinner when we are in our 60s.
Adopting these three habits can put you on a shortcut to your retirement and the earlier you learn these habits, the quicker you will get to your financial goals.
So, what are these habits? They are:
- Saving, saving, saving
It sounds as obvious as telling an overweight person they need to lose weight. It's one of those universal truths that everyone knows is good but few practice diligently.
Well, this is the uncomfortable starting point to building retirement wealth for ordinary Aussies. We have to learn to spend way less than we earn, and we need to pick this habit up as early as possible!
It really helps if you have a well-paying and stable job but you'd be surprised at how little you might need to get by if you were smart and disciplined about spending.
How much do you need to save? There seems to be a relatively wide range of answers from experts although I will say that your household is doing well if you can put aside at least 10% of your income.
The other thing I strongly recommend against is using debt to cover living expenses. If I can't afford something, I'd go without.
- Investing in equities
Having a disciplined savings habit will enable you to build a decent bank balance. This in turn allows you to invest in the share market and it is not a bad idea to invest in a low-cost index fund or exchange traded fund that tracks a share market index like the S&P/ASX 200 Index (ASX: XJO) (find out more by clicking here).
This low-touch investment approach can often earn you returns that are well in excess of what the bank will pay you in interest.
Markets are volatile so you could see your capital fall in the shorter term, but history has shown that the major stock indices often produce a decent positive total return over the longer term.
- Expanding your repertoire
As your confidence in investing in equities increases, you could start buying shares directly. But you probably come to a stage where you will need and want to diversify to other asset classes.
One popular asset that successful savers branch into is property. While there are several reasons why I prefer equities over property, I think it's a big mistake to have all your nest egg invested in one asset class – whether it's in shares or something else.
But I won't be too concerned about diversifying until you have at least a few hundred thousand in your share portfolio.
Being too diversified on a modest capital base can be value eroding as well due to fees and transaction and holding costs.
As always, you should seek professional advice before making any investment decisions as this article is only aimed at getting you to start thinking about your retirement strategy.
Happy investing fellow Fools!
