What to do with the 10% you saved? - July 24, 2019
The golden rule of saving money for retirement? We wrote about the 10% rule just last week. But what should you do with that money? That’s a different question, so let us walk you through some other (almost) universal truths!
Last week we talked about how much you should save every month to get a safe(r) retirement (see: The golden rule of saving money for retirement). In short, keeping 10% every month can help you reduce the risk of running out of money by 30% during your retirement, which is a lot. But how exactly you use your 10% is also an important part of reaching your goals.
A lot depends on your country
A huge part of what you should do depends on your country of residence. Although pension systems have serious problems everywhere (see: Retirement age is rising globally), their weaknesses and how to address them can vary a lot. In some countries pension is self-funded, somewhere state-funded, and there are mixed systems as well.
Still, most people underestimate how much they will need during their retirement, so saving up in advance is a good idea. What’s more, as life expectation is getting higher, you would need that saved up money for a longer period. That’s why you should do your own math in advance to see how much money you will need.
Adjust your risks as you grow older
No matter where you live, there are some (almost) universal truths about saving and investing money. First, investments have risks and costs as well, but you should always investigate the details. Many believe that life insurance is a good idea, but their costs are rather high, because the insurance part takes away most of your profits for years. (See CNN’s great explanation here.) Managing your own investments and day trading might also be a bad idea as we explained it before. (See: Why do people lose money on trading?)
Probably the best rule to follow here is to adjust your risks as you get older. For the most people having an investment portfolio that uses a wide variety of instruments is a good start. Stocks have a higher risk than bonds, but they also yield better returns. That’s why younger people should focus on stocks. As you get older, you should shift your focus towards bonds as they are safer. (See: Stocks and bonds: how to mix them?)
Discipline is key again
As most times with investments, discipline is pivotal again. The same is true for your saved up 10%. This amount should be untouched if there is no immediate crisis in your life. That’s why putting it on a different, but easily accessible bank account is not the perfect idea. Will you be able to resist the temptation of spending it when you have credit card in your pocket? Or when there’s a greater amount of money, will you say no to your dream car?
These decisions are harder to face than they seem. That’s why it’s also a good idea to choose an investment portfolio, because it makes “cheating” with your savings harder. If you’re worried about situations you need to use that money (losing your job for example), you can usually find investments that offer at least some liquidity without penalty to help you out when you really need it.
Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.