Stop Saving for Retirement: Here’s What to Do Instead!

Why Investing is the Key to Securing Your Financial Future

Oct 25, 2024

Yes, that's right—saving for retirement? Not so much. Here’s why:

“How much should I save for retirement?”

Here’s the twist: You shouldn’t save for retirement; you should invest for it!

Let’s face it, we often misuse the language around retirement. We say “save for retirement” when we really mean “invest for retirement.” And that’s a crucial distinction!

Saving is like keeping your money in a cozy cash blanket, but investing is where the real magic happens. Have you ever noticed how much more empowered it sounds to say “invest” instead of “save”?

Let's Break It Down:

Saving vs. Spending Consciously: Saving implies cutting back and living frugally, which has a bit of a downer vibe. I prefer to think of it as spending money consciously. This mindset tells my brain, “Yes, you can spend, but do it wisely!”
Savings Accounts: Keeping money in a savings account is fine for emergencies or short-term goals. But when it comes to retirement—a long-term goal—this approach won’t cut it.

The Dilemma of Saving:

Remember when interest rates were high and inflation was low? Good times, right? Well, those days are gone.

Today, low interest rates combined with high inflation mean that keeping your money in a savings account is like putting it on a treadmill—you’ll still have the same amount, but it won’t get you as far!

Example Time: Assuming an annual inflation rate of 5% (which peaked at 9% in recent years but is now slowly falling back to around 2.5%), that $1,000 will only have a purchasing power of about $613.91 in ten years. Even with a modest 2% inflation rate, it drops to $820.35. Yikes!

The Key to Retirement:

This is why it’s vital to let your money grow at a rate that outpaces inflation. We're talking about long-term savings here, not the cookie jar for your next vacation!

So, what should you do with your retirement funds?

Forget saving. Instead, invest! Sure, investing can be riskier, but it’s also the path to growth. The not-so-secret secret? Choose the right products that align with your strategy and start investing as early as possible.

Time is Your Best Friend: The more time you have, the more you can earn. This is not just about letting your money work; it's about choosing a riskier strategy to maximize profits. And guess what? With time on your side, you can weather those bumps in the market!

An Effective Strategy:

Consider an investment savings plan. This nifty approach means you don’t have to guess the perfect moment to buy. When the market dips, you grab more shares; when it rises, you buy fewer. It’s like dollar-cost averaging but with less stress!

A Final Word on Language:

It might seem trivial, but the difference between saying “save money” and “invest money” can significantly impact your financial confidence.

Investing is about putting your money to work rather than letting it snooze away.

When you invest, you show you care about your financial future. You’re not just sitting back; you’re actively making moves to secure a solid financial foundation for yourself.

So, let’s reframe that retirement question: “How much should I invest for retirement?” That sounds much better, doesn’t it?

Investing Tips for Beginners

Since we’re discussing an important topic today, let’s explore some investing tips to help you build a solid foundation for your investment journey. Rather than outlining the steps to get started, I’ll focus on strategies to develop the right mindset for long-term success.

Build a Solid Financial Base

The key to successful investing lies in a long-term approach. Always use money that you won’t need for at least five years; for example, your emergency fund should remain untouched.

Investing involves risks, and maintaining a strong financial starting position can help minimize those risks. You don’t want to be forced to halt your investments prematurely and potentially incur losses.

Here are some critical points to check off before embarking on your investing journey:

Have a Functional Budget: Ensure you have a budget that helps you monitor your cash flow every month.
Establish a Solid Emergency Fund: Set aside at least three months' worth of living expenses in a separate savings account.
Aim to Be Debt-Free: Ideally, you should be debt-free or well on your way to achieving that status.
Designate Monthly Savings: Allocate a specific amount in your budget for savings that you won’t need for at least five years.

These steps are essential prerequisites before investing your money.

Tune Out the Noise and Trust Yourself

In the world of investing, there’s a lot of noise, especially from those who haven’t yet invested. Often, those who are fearful or uninformed are the loudest, sharing horror stories that can create unnecessary doubt.

It’s essential to tune out this noise. You don’t need advice from people who aren’t where you want to be. Instead, trust your own judgment.

You can absolutely start from scratch and find success. Mistakes may happen, but as long as you seek information from reputable sources and listen to the right people, you’ll continue to learn and grow. Be cautious of media and social media too—sensational headlines are often designed to attract clicks. Stay focused on your journey and make decisions that align with your goals.

Schwar Capital

has already covered this topic in a great article, so there’s no need for me to add more.

Take Control of Your Financial Decisions

Don’t let anything stop you from making your own financial decisions. Understanding your risk tolerance is crucial. Every investment carries risk, so before you begin, assess how much risk you're comfortable with.

This can change over time—when you're younger, you might take on more risk for higher returns, while approaching retirement may call for safer, steady growth.

Know your current risk tolerance so your strategy aligns with your comfort level.

Find a Reliable Broker

To invest, you'll need a broker—a bank where you can buy stocks and funds. While any bank can do this, specialized brokers offer more products, services, and guidance. It's important that your broker supports you throughout the process.

For flexibility, I recommend an online broker. I’ve used Consorsbank (based in Germany) for years to manage my portfolio easily and for free. Other options are Fidelity or Charles Schwab.

They offer a wide range of products, helpful information, and great service, making it beginner-friendly even with small investments.

Keep Costs Low

Minimizing costs is key when choosing an online broker, as high or hidden fees can reduce your profits. Look for low or fee-free trading options, and avoid hidden costs like inactivity fees. For example, Consorsbank offers free account maintenance and fee-free trading on many funds.

If you invest €100 monthly in an index fund savings plan, the full amount goes toward shares, unlike funds that may charge up to 1.5%. Also, consider management fees—actively managed funds charge 1.5% to 2.5%, while index funds and ETFs typically charge less than 1%.

Automate Your Investments

I’m a strong advocate for automating all aspects of your finances, especially investments. Automation simplifies the process, allowing your money to grow with minimal effort. The less you manage manually, the less overwhelmed you’ll feel, increasing your chances of sticking to your investment plan.

Here are two effective ways to automate:

Automated Investment Savings Plan: Set up a monthly, weekly, or annual investment that automatically puts a predetermined amount into an index fund. You can start with as little as €10 a month. While it may not seem like much for wealth building, it’s an excellent entry point to develop a regular investing habit.
Dividend Reinvestment: If you invest in dividend-paying securities, opt for automatic dividend reinvestment. Most brokers offer this feature, allowing you to reinvest dividends into additional shares, increasing your payouts over time through the power of compound interest. With funds, reinvestment typically occurs automatically if you choose the accumulation option.

Shifting your mindset from saving to investing is crucial for building a secure financial future. By understanding the distinction and taking proactive steps, you can ensure your money works harder for you, even in a changing economic landscape.

Join my tribe on your wealth journey 🪙! Together, let’s save more, invest more, and earn more—all while living our best lives. Your financial empowerment starts now!

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