You probably want to be able to retire with the independence to do whatever you want. But at the same time, the road of life is long and winding, and it can be easy to lose track of your goals and priorities.
The reality is, millions of Americans fall short of their financial retirement goals every year. Furthermore, too many retirees lack something that gives them purpose, or keeps them socially and physically active. This can have just as much negative impact on retirement quality as poor financial planning.
Want to avoid these retirement pitfalls? Here are three retirement rules everyone should follow. It doesn't matter if you're fresh out of college or just turned 60, these rules can help you get on -- or back on -- the right track to the retirement you want to have.
Rule 1: Time is your most valuable resource (and it's not renewable)
One of the biggest mistakes people make is putting off saving for retirement. It's not uncommon for people to think that they can just contribute more down the road when their income is higher or they have less debt and more disposable cash, but that plan ignores a simple rule: Even relatively small contributions can really add up over time.
Here's what happens when someone starts saving at 30 instead of 40. And we aren't talking about a lot of money -- the example below is based on someone contributing 1% of a $50,000 annual salary, and getting a 3% raise each year:
As you can see, that extra 10 years of contributing made a huge difference in returns by age 67. But here's the real kicker: The contributor who started at 30 would have contributed only about $6,400 more than the person who started at 40, but he or she would end up with $140,000 more at retirement.
It's also imperative to increase your contribution percentage each time you get a raise. Not only will you not miss the money, but it should make a massive difference in the size of your nest egg come retirement.
Rule 2: Pay attention to fees; less is best
Retirement investing can be rife with fees, and people often have no idea how much they are paying. Furthermore, there's a strong correlation between high fees and poor returns, with the vast majority of actively managed -- and more expensive -- mutual funds underperforming their benchmark on a regular basis.
A recent study of mutual funds by Morningstar goes even further, claiming that high fees are a predictor of poor fund performance, and that cheaper funds are far more likely to perform better. For instance, the study found that U.S. equity funds with fees in the bottom 20% (meaning lowest), had a total-return success ratio of 62% between 2010 and 2015, while those funds in the top quintile of fees -- the most expensive -- had a total return success rate of only 20%. The study looked at funds that invested in numerous other assets classes as well, and found similar results: Cheaper funds have a higher likelihood of better returns than more expensive ones.
How do you minimize fees? When researching mutual funds, often the best place to start is with index funds which invest in the same holdings as popular indices, such as the S&P 500, Dow Jones Industrials, and Russell 1000 for example, and to avoid actively managed funds which tend to cost a lot more than index funds and, as discussed above, are likely to produce worse returns to boot.
The key number to look for is the expense ratio. This number is published in every fund prospectus, and is the percentage of assets the fund manager charges each year to run the fund. You'll never get a bill for this; fund managers will simply take a cut directly from the fund's assets.
Rule 3: Your retirement plan needs to factor in more than just money
While having your financial house in order is critically important for a high-quality retirement, it's not the only thing you must prepare for. When you retire, you're walking away from years -- often decades -- of time and commitment to your work, and too many retirees find themselves with little that fills this void. It's not just filling the daylight hours, either. An all-too-common struggle for many is the loss of purpose that can accompany leaving a job.
Before you retire, consider how you'll fill your free time, beyond the golf outings, fishing trips, and family vacations. At some point (and maybe sooner than you expect) you'll find yourself with a lot of free time and nothing to do. It may start with too much daytime TV, but can quickly turn into social isolation and even depression.
The point is, cold turkey may not be the best way to retire. It's a good idea to line up a slate of activities including volunteer work, exercise, and social activities to augment the golf and fishing.
Retire on your own terms -- but be sure to define those terms
The three retirement rules above may not cover everything about retirement planning, but they're a solid foundation of guidelines to help you get started on the right track. Whether you're decades away from retirement or it's closer than you want to admit, the rules above apply to you just the same and can help you reach retirement in better shape. Maybe more importantly, they can help you get more out of retirement when your time comes.