It never ceases to amaze me how many people literally pay zero attention to their retirement savings. They treat their pension like it’s something that has absolutely no relevance to the real world.
The fact is your pension is relevant. And the way it’s invested has huge implications for your lifestyle in the future. Therefore, if your goal is an early retirement, it’s probably worth spending a few minutes every now and then to check your investment strategy and make sure you’re on the right track.
Here are three things you can do today to improve your chances of an early retirement.
Find out how your pension is invested
This is a good place to start when analysing your retirement savings. It sounds obvious, but you’d be amazed how many people don’t know.
So dig out your pension statement or log on to your pension account and find out how your money is actually invested.
Are your savings invested in a ‘balanced’ fund or a ‘growth’ fund? Which investment managers are managing your money? Do you have the flexibility within your pension account to invest in specific funds or securities yourself? These are all important things to find out.
Once you have this information, determine whether your current investment strategy is actually suited to your requirements. For example, if you’re still young, have 25 years until retirement, and want to retire early, a balanced portfolio may not actually be the best option for you. You may be better off with a high-growth investment strategy, in order to grow your savings at a faster rate.
Understanding how your money is currently invested is important when planning for retirement.
Develop a suitable asset allocation
If you believe that your current investment strategy is not properly tailored to your unique circumstances and goals, it’s worth spending some time developing an ‘asset allocation’ that is suited to your requirements.
Asset allocation refers to the mix of different assets (shares, bonds, cash etc) within your portfolio. It’s an important concept in investment management, because it’s one of the key drivers of long-term returns. A sound investment strategy starts with an asset allocation that is optimised for your objectives, requirements and risk tolerance.
If in doubt about a suitable asset allocation, don’t hesitate to speak to an expert. Getting this step right is essential.
Diversify
Lastly, if you want to give yourself the best chance of an early retirement, it’s important to think about risk and ensure that your capital is properly diversified. This means investing in many different funds, securities and geographic regions, so that your portfolio isn’t exposed to one particular investment.
To illustrate the dangers of not being properly diversified, consider the poor recent performance of Neil Woodford’s Equity Income fund. Over the last year, this fund has fallen around 10%. So, any investors that have had their savings invested entirely in this fund over the last year will be disappointed. It’s vital to spread your capital out over many different investments.
Taking a few minutes to occasionally check that your retirement savings are invested optimally is a sensible move, especially if your goal is to retire early. Play your cards right and your dream of an early retirement may become a reality.