We all dream of a wealthy retirement. Luxury holidays in the Greek Islands, Mediterranean cruises, golf trips with old friends… It sounds pretty good, doesn’t it? It certainly sounds better than counting your pennies every week on the State Pension. Yet, is this kind of lifestyle achievable for the average person?
Actually, it is. Having said that, it won’t happen automatically. To retire wealthy, you need to be smart with your retirement savings. More specifically, there are two key money moves that you need to make as soon as possible if you want to become wealthy.
Step 1. Get out of cash
The first key move is to ditch your cash savings. OK, not all of your cashing savings. As I explained recently, it’s important to have some cash available for emergencies, as life has an annoying habit of throwing up financial surprises.
Yet, as a long-term savings tool, cash is pretty much useless. The reason I say this is that money held in cash, at current low-interest rates of around 1%, is actually losing value over time.
You see, inflation — the slow increase in the prices of goods and services over time — will destroy your wealth over time if you’re not careful. You don’t notice inflation on a day-to-day basis but, over time, it adds up and can have a devastating effect on your wealth. For example, when I first moved to London in 2005, a weekly zone 1-2 travelcard cost £21. Today, 13 years later, that same travelcard costs £34. In other words, the price of travelling around London has risen by almost 4% per year.
So, you may think that you’re growing your money at 1% per year if it’s held in a savings account, but realistically, when you consider the effects of inflation, you’re actually going backwards. Leave your money in cash savings earning 1% for 10, 20, or 30 years, and you’ll find out down the line that you’re actually able to afford fewer things than you can buy today with that money.
Step 2. Invest in growth assets and reinvest your earnings
The next thing that you need to do if you want to retire wealthy is to invest your money in a diversified portfolio of growth assets. I’m talking about investments such as shares, mutual funds, investment trusts and exchange-traded funds (ETFs).
You’ll also want to reinvest your gains every year because it’s the power of compounding — earning interest on your interest — that will really propel your savings over time.
Over the long term, these kinds of assets are likely to boost your wealth considerably. For example, analysts at Hargreaves Lansdown last year found that had you invested £10,000 in the FTSE 100 index (the stock market index that tracks the largest 100 companies in the UK) on 31 August 1987, and reinvested your dividends every year for 30 years, your capital would have grown to around £106,000. That’s a healthy annual return of 8.2% per year on average, which is far higher than average inflation rates.
Of course, when it comes to growth assets, past performance is no guarantee of future performance. However, the chances are that growth assets will provide you with a decent return on your money in the long run if you reinvest your earnings. And that, ultimately, is the secret to retiring wealthy.
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