Walter Updegrave from Money Magazine shares the secret to retiring rich: Increase your savings.
According to a study by Putnam Investments, your investment performance has less to do with how good you are at picking stocks and more to do with how much money you invest.
In other words, saving more leads to, well, more savings. Not exactly a revolutionary idea, true, but it’s surprising how big a bang you get by upping the percentage of salary you put in and how slight the payoff is from being a fund savant.
Updegrave provides an example where increasing the level of contribution in underperforming funds provides a balance increase of $80,000 while changing to better performing funds without the contribution increase leads to an increase of only $2,000. Your mileage may vary.
I would like to be able to maximize my 401(k) by contributing $14,000, but that’s pretty unreasonable when my income before taxes, before bonus, and before overtime is about $40,000 while my rent is about $11,000 a year. Right now, I am contributing 4% of my salary, the minimum to take full advantage of the company’s matching contribution. I plan on increasing my 401(k) contribution a little bit for 2006, but I haven’t decided how much.
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Yikes! I’ve decided to use my spare cash toward paying down my mortgage debt instead of doing further saving. I hope the aggressive saving I did in my early years will be enough.
I should mention also that in addition to paying down my mortgage, I am still saving toward retirement in my 401k and IRA. I’m just not doing any investing outside of my retirement accounts.
Automatically investing in index funds each month is a good low maintenance strategy.
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