Saving More Beats a Higher Yield

CNN Money addresses a question from a reader about how to best grow his retirement savings. CNN covers a variety of issues in their response, but they focus in on which is the better option -- saving more or having a higher return rate. Their thoughts:

If you could do just one thing to improve your outlook, what would it be? Save more or earn more?

You can't, of course, say you'd prefer an 8% annual return instead of 6% and turn a dial higher to get it. The investing world doesn't work that way. So to try to earn more you have to invest more aggressively.

In this example, both increasing your savings rate from 10% to 12% and shifting to a more growth-oriented portfolio that's 80% stocks and 20% bonds -- an appropriate mix for a 35-year-old -- will boost your chances of retirement success. But saving more has a larger effect than earning a higher return would.

Notice the last sentence. Sooooooo true. In fact, I've noted this a few times here on Free Money Finance. My key thoughts can be seen in the post The Best Way to Maximize Your Investment Return. The summary: saving more for a longer period of time is the best way to increase the value of your investments. And good news goes along with that: it's easier to increase your savings and save longer than it is to increase your return rate (as CNN notes).

That said, why not do all three (save as long as you can, save and much as you can, and get a good return)? You should do all three. Here's what CNN says about it:

In the real world you're not limited to one move. You can bump up the amount you save and improve a sub par investing strategy. Do both those things -- which, ideally, you would -- and you can feel even more confident about achieving a secure retirement.

Here's what I'm doing to grow my investments as much as possible:

• I'm saving/investing as much as I can each year in a variety of ways.


• I'm doing all I can to maximize my return rate by investing in index funds in the lowest cost alternatives I can find.


• I'm going to postpone withdrawing funds from my savings for as long as possible by working part-time once I "retire".

How about you? Are you saving as much as you can? Is there anything you could do to save $1,000 or more extra each year? If you want some ideas, check out these ways to make more money. Perhaps they'll provide some ideas on how you can earn some extra income (which you can then put into savings).

Comments

[Old Limey]

"But saving more has a larger effect than earning a higher return would." - How True!

I have seen advertisments in our local newspaper offering investors guaranteed ? yields of 8%, paid monthly from real estate investments. I wouldn't touch one of these with a 10 foot pole.

I also read stories about very trusting old people that get taken by these kind of sharks and end up losing most of their investment.

My advice is to only invest through highly reputable, long standing companies. The two best in my opinion are Fidelity and Vanguard. You can still lose a bundle depending upon what you decide to invest in but at least it won't be as a result of fraud. I see that Italy's 10 year bonds are yielding 7% - Takers anyone?

[Matt]

I think with the turmoil in the markets over the past few years that the only way to make up for these lost 3 years of lack luster gains or in some instances losses in the market is to save more money.

[Rich Uncle El]

I think a good mix of both is needed to reach your overall goals with retirement, but the only one we actually can control is increased savings. So do it early and often to garner an advantage in the compounding game.