(Worth) - The key to a successful retirement investment strategy is to start early, invest slowly and diversify, diversify, diversify. At least, that’s what most of us have been taught.
The problem is this formula doesn’t work if you want to retire before the age of 75.
49 percent of US adults ages 55 to 66 have no personal retirement savings, according to the US Census Bureau’s Survey of Income and Program Participation. The percentage of those who are unprepared is even higher; just 22 percent of women and 30 percent of men have $100,000 or more for their retirement.
What should we do instead? Replace diversification and an expectation for slow-and-steady returns with laser-sharp focus and a rate of return that will get you to your wealth dream earlier.
How This Works
Your first step is to get crystal clear about your financial goals. In my work with thousands of people, I’ve seen firsthand how those who don’t have a specific goal in mind are unlikely to have much success.
After you have clarified your dream, one of the most important tools you’ll need is an understanding of the basic principles of building wealth. This includes knowing how to specialize as an investor, ideally focusing on a single asset class that you enjoy and that fits your desired lifestyle. It is one of the best ways to increase your returns and shorten the amount of time it will take you to reach your goals.
Now, I know what you’re thinking. Focusing on a single asset class sounds risky, right?
It only sounds risky because we’re conditioned from an early age to equate diversification with risk mitigation. Mutual funds are deemed safer than single stocks. A portfolio of stocks is considered safer than real estate. A real estate portfolio is thought to be safer than a single business venture. As the proverb says, “Don’t put all your eggs in one basket.”
What this line of thinking leaves out of the equation is the value of education. If you aren’t educated about a specific asset class, investing heavily in that one area is incredibly risky. But if you take the time to learn about the sector and the specific markets and properties in which you plan to invest, much of that risk disappears.
The Four Benefits of Real Financial Education
Four things happen when you increase your knowledge of a specific investment:
- You increase the level of control you have around the investment. More knowledge allows you to be a wise and active participant in managing the asset. In our multi-family housing example, more knowledge means you won’t be beholden to a property manager for your decisions. You will be able to confidently direct how your building is marketed and maintained.
- Your rate of return typically increases. Wise investors use their knowledge and control to make decisions that will improve performance. As an apartment owner, for example, you would use your knowledge of the real estate market to plan upgrades to a property that will appeal to more affluent renters and also add long-term value to the building.
- Your taxes go down. What most people have learned about taxes is wrong. Taxes are not the government’s way of “sticking it to the wealthy.” All the tax law really does is set a framework for what kind of money is taxed and at what rates. If you and I do precisely the same thing when it comes to money, we will pay the same amount of tax.
But the tax law is packed with incentives the government has created to encourage people to do specific things with their money. The more knowledge you have about those incentives, the less you’ll pay in taxes. One of the first things you’ll learn is that the government favors investing in assets over increasing a salary. The more money you earn, the more taxes you pay. The more assets you acquire, the less taxes you pay. - Your risk goes down. When you combine a high level of control with higher returns and lower taxes, you will have greatly reduced the risk associated with a specific asset class. Compare your average mutual fund to a multi-family housing property that you control in a market you know like the back of your hand and that generates a high rate of return with additional tax benefits. Which one feels like the bigger risk now?
The real key to a successful retirement investment strategy—or any investment strategy—is financial education that includes proven systems for building wealth and reducing taxes. It is a gift you can give yourself, your family and generations to come.
By Tom Wheelwright
June 21, 2022
