Here at the Fool, we think the dream of retiring with a seven-figure portfolio is not only desirable but, for many people, actually very achievable.
Despite this, there are a number of pitfalls that could prevent you from reaching the magic million. Here are three corkers.
1. Keep spending more than you earn
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Investing only becomes possible when you have money to spare. For as long as you splurge your cash on stuff you can’t afford, or will never use/get enjoyment from, you restrict your ability to build a sizeable nest egg.
I’m not advocating a monk-like existence here. That said, it’s important to develop the mindset of regarding any spare cash as investable rather than disposable. In other words, there must be an understanding that every pound needlessly spent means far less wealth later down the line.
This is why having a budget is so important.
It doesn’t need to be complicated. Subtract all the essential bills, direct debits and expenses from your monthly pay packet. Whatever remains should first be used for tackling any debt. Once cleared, it’s then a good idea to automate contributions to your investment account at the start of every month. By transferring that cash as soon as possible, you won’t be relying on finite willpower to resist spending it.
2. Don’t take risks
So, what should you do with your new cash surplus? That depends on your risk level.
Clearly, what constitutes ‘risk’ will vary from person to person. Some perceive anything outside of standard current account as risky full-stop. At the opposite end of the spectrum, there are those who only consider micro-cap oil and gas shares as scary.
But let’s be clear, if you’re not prepared to put at least some of your money into equities, you’re unlikely to ever reach millionaire status. Holding a substantial cash position might be comforting but inflation erodes its value over time, making the act of not doing anything with it riskier than doing something. Bonds might be a better option but the fairly low returns mean they’re more suited for those already close to retirement. A property might be a solid long-term investment but it remains an illiquid asset that you can’t sell with a click of a mouse.
Since shares have a tendency to outperform everything else over a long enough timeline, I know my preference.
3. Forget about tax and costs
While picking winning stocks will undoubtedly do your dreams of retiring as a millionaire no harm at all, it makes complete sense to do everything you can to ensure as much of that hard-earned profit stays in your pocket. That’s why having your holdings in a tax-free wrapper, such as a stocks and shares ISA, is a no-brainer.
Since no one knows which direction it’s going over the next few weeks or months, it also makes sense to avoid jumping in and out of the market on the assumption that you can time its peaks and troughs. Not only is this near-impossible, it’s also potentially very expensive with every buy or sell command moving precious cash from your account to your broker.
It’s no surprise that the people most likely to become millionaire retirees tend to be those who have cultivated the ability to sit still most of the time.
