The key to retirement saving – start as soon as you can

Writing for Morningstar, Paul A. Merriman says saving for retirement is “easier than you think.”

“Time – lots of it – is your biggest ally,” he writes. And the process of saving for retirement, he insists, is “easier than they think… if they get a few things right.”

First, he suggests, “you’ve got to set aside money regularly, without fail.” Even small amounts will add up over time, and “you have to invest that money where it will work hard for you.”

And you have to start – right away, if you haven’t already, he adds.

“If you haven’t yet `got around to’ starting a retirement savings program, do it now. Start this very week, using whatever money you have. It will feel good to be on your way,” he explains.

Once you start, keep it going regularly “with a plan you can afford,” he adds.

“Get the long-term power of the stock market working for your savings right away,” he notes, and “find a way to make your savings automatic, so you don’t have to think about it every month or paycheque.”

Consider, he suggests, your “savings plan as if you were starting a business, along with a terrific business partner: the stock market.”

“Your job: Fund the business by regularly adding capital. Your partner’s job: Make that capital grow big enough so you can retire comfortably,” he writes.

He provides an example of the return rate someone would get if they put $1,000 a year into an index stock fund starting in 1985. If you increased your contribution by three per cent each year, he writes, “and kept doing it until the end of 2024,” you would have earned $4 for every dollar you contributed after 15 years.

You must factor in inflation as a consideration, he writes. So what’s a good amount to set aside each year?

“If you can set aside 10 per cent of your earnings each year and invest that money intelligently, you’ll be well on your way toward a comfortable retirement,” he writes.

“If you’re fortunate enough to work for an employer that matches some part of your contributions in a retirement plan, you’ll do considerably better than this table suggests,” he adds.

“The `magic’ in this scenario comes from doing what millions of people do all the time: They engage a willing and capable business partner (the market) in order to own stakes in hundreds (and in many cases thousands) of real-world companies,” Merriman writes.

“Every business day, employees of those companies show up for work. Managers figure out how to profit from that work. Executives plot to make sure investors get a share of those profits,” he continues.

“Your job as the `senior partner’ in this little business arrangement is to keep your focus on the big picture and the long term. If you do that and let your partner do its job, the long-term payoff can be huge,” he concludes.

Automating your savings, and ramping your savings rate up when you get a raise, are key pieces of the savings puzzle. Members of the Saskatchewan Pension can choose to make their contributions automatically. You can let us know (PAC-PCC-application.pdf) where you want your contributions to come from – either a bank account or your credit card. We’ll do the rest, and invest your savings in our professionally managed, low-cost pooled fund.

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Investing is a lot like golf. Anyone can get some clubs and play the game, but very few of us get to the point where we’re breaking par. That level of skill tends to be the exclusive domain of professionals, or well-trained amateurs, rather than those teaching themselves via social media, websites, and “can’t miss” tips from friends.

With investing, again like golf, there are common mistakes to avoid that will improve your results. Save with SPP had a look around the Interweb to find out what folks think you should not do when it comes to managing your investments.

Writing in the Financial Post, Peter Hodson warns of the danger of “anchoring.”

“Do not anchor your expectations to where the stock has been in the past. Anchoring can cause you to keep a stock far longer than you should (it used to be $100, so it must be cheap now), but it can also keep you from buying a stock that has already risen (it is too expensive now). The only thing that should matter is what a stock may do going forward,” he writes.

He also warns about focusing too much on the yield of a stock.

“If the stock declines 25 per cent then of course that seven per cent (yield) was only just the `hook’ that got you into a sinking ship. It is far better to focus on companies with lower dividends that have the ability to raise them. Dividend growth stocks have been proven over time to be much better performers than high-yielding stocks.”

At the Morningstar site, we learn that diversification — often touted as a way to avoid downturns — isn’t always a safe harbour.

“2022 is an example of a year where more assets in the portfolio would not have offered more diversification. The only asset classes that have delivered positive returns are the energy sector, the U.S. dollar and some ‘niche’ markets such as Brazilian equities,” states Morningstar’s Nicolò Bragazza.

In plainer terms, moving eggs into different baskets in 2022 would have led to quite a few broken eggs.

He also adds these ideas — the false belief that “history always repeats itself” when thinking about past market performance, and “trying to predict the future” of the markets. No one knows what’s going to happen next, he explains.

The Motley Fool blog offers up a couple more.

Don’t, the blog advises, “have a short-term focus” when investing.

“Having a longer-term focus can help you wait out a crash until the market recovers, which it often does within only a few months. Indeed, the average stock market drop takes about six months before changing direction — and most take less than four months,” the article tells us.

Similarly, if things are going south with the market, don’t sell off your holdings in a panic.

“One mistake many make when the market crashes is selling out of it. They’re doing the opposite of the old investment chestnut to `buy low, sell high.’ If your portfolio plunges by, say, 30 per cent, you haven’t technically lost any money until you sell your shares and lock in that decline. Hang on and you’ll often be able to sell later, at a significantly higher price.”

We have done most of these mistakes over the years, as well as a few other ones, like plunking down money on “can’t miss” hot tips from friends that turned out to be big losers. Buying shares in a company teetering on bankruptcy because of the belief that it will make a comeback probably has paid off for some folks — not us!

It’s a place where expertise is necessary. Most professional money advisers we know advise that ordinary people get help with their investments. Fortunately, that professional investing advice is included when you become a member of the Saskatchewan Pension Plan. SPP will invest your retirement savings in a low-cost, pooled fund that is managed by experts. You can leave the heavy lifting of reading the tea leaves on ever-changing markets to them.

News just in — contributing to SPP is now limitless. There is no longer an SPP limit (you can contribute any amount up to your full registered retirement savings plan room) on how much you can contribute to the plan each year, or transfer in from a registered retirement savings plan. Check out SPP today!

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