Knowledge is everything and as it turns out it is true when it comes to retirement. Having enough money to meet your goals and objectives during retirement is critical on how to retire rich. One study confirmed that if you could answer questions about interest rates, inflation etc, you stood a much better chance of having enough money to retire. Most people cannot answer these questions and have to live unknowingly with less money than they should be. It affects their quality of life during retirement which is when we should all be enjoying our lives.
In fact over your working life you could end up with 25% more savings if you understand and can answer the following three questions.
Three Important Questions
- Interest Rate: Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow? Answer choices: More than $110, Exactly $110, Less than $110.
The answer is More than $110, assuming that you reinvested the interest income each year. At the end of the first year you would have $102. At the end of the second year you would have $104.04 An additional four cents is not much in this example, but it adds up quickly when you are talking thousands of dollars.
- Inflation: Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account? Answer choices: More than today, Exactly the same, Less than today.)
The answer is less than today. Your savings account would have $101 dollars in it at the end of the year. With two percent inflation your original $100 would only purchase $98, add your $1 income and you have a total of $99 in purchasing power at the end of the year. If you had to pay income tax on this income, then you will have even less to spend.
- Risk: Is this statement True or False? Buying a single company’s stock usually provides a safer return than a stock mutual fund.
Diversity is incredibly important to avoid losing everything when you invest on one company and it goes bankrupt. Mutual funds go up and down. But at least you are protected because you are invested in many companies in stocks and bonds as well as cash. Remember that regardless of how you invest, spread your investments across good quality mutual funds or stocks.