2 Words That Will Save Your Retirement

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Many people believe that the best way to save for retirement successfully is to make the most money possible from their investments. That never hurts, but there's a simpler way to ensure that you'll be able to make ends meet both now and in retirement, and if you follow it, you'll also put yourself in a much better position for your investments to perform the way you need them to in order to reach your financial goals.

What won't save you
I'll get to what those two words are later in this article. But first, I want to talk about some things that you can't count on to get you to a healthier retirement -- at least not by themselves.

One of the things retirement investors do to try to get ahead is to pile into particular sectors. For instance, small biotech companies Exelixis (Nasdaq: EXEL  ) and Amarin (Nasdaq: AMRN  ) have huge potential, but they also carry big risk. Although fellow Fool Brian Orelli sees them as prospective takeover targets, they could also have profit potential on their own -- as long as they actually get their blockbuster drugs through the pipeline and gain FDA approval. Without approval, though, similar companies have gone to zero.

You see the same all-or-nothing style bets with oil exploration company ATP Oil & Gas (Nasdaq: ATPG  ) as well as scandal-ridden Chinese small caps like Advanced Battery Technologies (Nasdaq: ABAT  ) . If a small energy company hits it big, the sky's the limit for the stock, but it could easily go bankrupt without it. And depending on whether allegations over Chinese small-caps are true, shares could soar or plummet.

Similarly, levered sector ETFs like ProShares Ultra Oil & Gas (NYSE: DIG  ) and Direxion Daily Financial Bull 3x Shares (NYSE: FAS  ) can make you a fortune if you predict short-term movements correctly. For instance, the ProShares Ultra Silver ETF (NYSE: AGQ  ) has risen nearly 800% over the past two years thanks to the explosive move upward in silver prices. But over time, levered ETFs can cost you plenty -- even if you prove to be right about your guess on the direction of the respective markets they track.

Concentrated bets can sometimes work if you have special expertise in any area, but putting your entire portfolio at risk is still a bold call. You might get lucky, but you could just as easily lose everything -- and that's a risk most people simply can't afford to take.

Getting blood from a stone
Other advice you often hear from financial planners is to boost your income. But in tough times, you simply can't count on being able to do that. In tough times, many workers are already stretched to the limit in their attempts to try to keep their jobs and maximize their income. Others are desperately searching for more work but have had no success.

Moreover, even during better times, you may just be unable to work any harder than you do. And while taking time off to get more education might eventually lead to higher income, it's tough to make the sacrifice now to get that faraway payoff.

Let these two words save you
No, the best advice for most investors is simple: spend less.

Sure, some people have already cut their budgets to the bone. But I'd wager that if I challenged you to take a close look at your spending over the past several months, you could come up with at least a few areas you could cut back on.

The thing about cost-cutting is that it saves you twice. First, it frees up more money for savings. But more importantly, it also allows you to set more realistic goals for your retirement nest egg -- because if you don't spend as much, you won't need as much money when you retire. That in turn gives you the flexibility to avoid taking huge bets with your money, instead making room for safer all-purpose investments like index ETFs or mutual funds.

The thought of looking at your budget is enough to drive some people to tears. But if you haven't been paying attention to where your money's going, odds are that you'd find some big leaks -- and if you plug them, you'll be able to be a lot more comfortable with your finances.

So to take the pressure off your investments and figure out some ways to spend less. It may be the most liberating thing you ever do with your money.

Learn all the basics of financial planning with our 13 Steps to Investing Foolishly. It'll get you on track to a great financial plan in no time.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.

Fool contributor Dan Caplinger gets a little closer to retirement every day. He doesn't own shares of the companies mentioned in this article. The Fool owns shares of Exelixis, which is a Motley Fool Rule Breakers selection. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy means you'll hear way more than two words from all of us.

Read/Post Comments (6) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 25, 2011, at 4:46 PM, Gonzhouse wrote:

    My two words: Precious Metals

  • Report this Comment On April 26, 2011, at 11:20 AM, peeweeninja wrote:

    How do I get my range rover if I am spending less?

  • Report this Comment On April 26, 2011, at 11:35 AM, XMFShirKi wrote:

    Great article, Dan! I think this is a cornerstone of being successful. The Millionaire Next Door is not the one with a fancy car, a Louis Vitton bag, or an ostentatious watch. He or she will often look and act middle class, while in fact they have much more assets than the folks leasing a new car every year or buying a bigger home which they don't really need.

    A few more tips for interested readers:

    * Author David Bach has some very good ideas on how to spend less, and more importantly, to align whatever spending you retain with your life values and goals, instead of just materialistic spending. He calls this "The Latte Factor", using the daily fancy latte as a metaphor for small recurring expensive that can rob your future.

    * It's much easier to save money you never see. When getting a pay raise, make sure to increase your savings before increasing your lifestyle.

    * If saving doesn't come easy, try to use automatic savings plan: that way you make a conscious decision once, and then don't have to think about it every paycheck. (Bach's book, The Automatic Millionaire, discusses this at length.)

    * Use free tools like, that hook into your bank and brokerage accounts, loans, and credit cards. They can help you automatically see what categories are dominating your expenditures. That helps you reevaluate your spending without walking around with a notepad and recording every single dollar manually (what a pain). Mint also has ability to set measurable goals and budgets which they keep track of automatically for you.

    Best wishes,


  • Report this Comment On April 26, 2011, at 11:36 AM, PearlGreatPrice wrote:

    Spend less, invest it in ATPG and you will help your retirement even more. For the foreseeable future we need oil. Barring another GoM accident or terrorism attack, ATP will grow very profitably over the next few years. Even TMFdoodlebugger owns ATPG. Follow the ATP Fool board for updates.

  • Report this Comment On April 26, 2011, at 7:21 PM, David369 wrote:

    I don't know about ATPG. If I had invested in it 5 years ago I would have half as much money today. Demand for oil hasn't gone down has it? You might want to look at another stock for retirement. Granted, the past doesn't predict the future but it sure makes you think about it.

  • Report this Comment On April 30, 2011, at 2:25 PM, AirForceFool wrote:

    Gonzhouse and GPP have it right in my book... oil and PMs... though I think silver is getting ahead of itself, I'm still buying... just watching daily... ATPG has huge potential, and I have quite a bit (well, a lot for me)... sure they have a lot of debt etc... but once they bring the new wells online, folks will be forced to revalue them based on the higher production numbers, and you won't likely get $20 shares... it is volatile though, and not for everyone...

    Great article IMO... if you don't have kids that will support you, don't plan to work till you die, or don't think SS will cover all your needs, you need to save something...


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