How to Retire Rich

By Tim Lemke on 25 May 2016 0 comments

Here at Wise Bread, we've told you a lot about how to grow a retirement fund that will allow you to live comfortably after you stop working. Usually, this means saving enough to be able to maintain your current lifestyle and prepare for your long-term care.

But what if you want to really live it up in retirement? How can you accumulate enough wealth to be considered among the truly rich? There's no magic bean to help you get super-wealthy. But smart and disciplined investors can amass retirement accounts in the tens of millions of dollars, simply by earning a bit more, investing more aggressively, and for a longer period of time.

Let's take a look at these strategies for building serious wealth in retirement.

Earn More

While it's certainly possible to build a very nice retirement fund even if you earn a modest salary, the path to top-tier wealth usually comes from having a high income. So get to work!

Those with very large retirement accounts often have the ability to max out their 401K plans each year ($18,000 annually) and likely a Roth IRA, as well ($5,500 per year). Earning more money also helps you avoid debt, and it expands your ability to move into other great investments, such as real estate. Even an extra few thousand dollars a year will give you the ability to invest more aggressively in order to accumulate more over the long haul.

"I think people would be surprised to learn how hard the 1% work," said David Schneider of Schneider Wealth Strategies in New York. "You've got to work long and you've got to work hard."

Start Investing Early and Stay in the Game

One of the most important tools for building wealth is time. We've written a lot about the power of compound interest, and time is arguably more important than the rate of investment return and contributions.

Let's say you start with $50,000 and contribute another $5,500 each year. Assuming a 7% annual return, you'll have $280,000 in 20 years. In 30 years, you'll have $631,000. In 40 years, you'll have $1.3 million. In 50 years, it's $2.6 million. So you can imagine how important it is to begin saving for retirement right when you begin earning money.

Own Your Own Company

It's nice to own shares of companies and see their value grow over time. But if you want to get super rich, you will want to own the whole business. If you work for a company and take a salary, there's a ceiling to how much you can earn and invest.

Most of the wealthiest people on Earth are people who started their own companies and watched them grow into huge enterprises.

"By building something, that's where you see the biggest successes," said Andrew Rafal of Bayntree Wealth Advisors in Scottsdale, AZ.

Don't Do Stupid Stuff

While all investing comes with risk, there are certain things that every person should avoid if they plan to retire rich. Financial advisers say it's imperative that investors avoid major mistakes that wipe out large portions of their savings. This means staying away from more complicated and risky things like options, or trading on margin (which Rafal called "a recipe for disaster").

Don't place all of your money with one investment, and stay away from get-rich-quick schemes or products that claim to be able to time the market.

"You have to sort of put a garbage detector on," Schneider said.

Invest in Small Cap and Value Stocks

Conventional investment wisdom suggests that people invest in a mix of equities from varying industries, often weighted toward stable, large-cap stocks. This is good advice, but those who are willing to take on a little more risk may be able to supercharge their returns.

Investing more heavily in smaller companies and looking for undervalued stocks will help lead to longer returns over time, financial advisers said.

Schneider noted that between 1972 and 2015, small cap value stocks generated an average return of 12.9%, compared to 10% for large cap. That 3% gap may not seem like much, but if you started with $10,000, it was the difference between $600,000 and nearly $2 million.

"Over time, smaller companies do better than large stocks, and if you combine that with value stocks, you get more bang for your buck," Schneider said.

He acknowledged that there is more volatility with small cap stocks, but said the higher returns were "compensation for taking the bigger risk."

Live Within Your Means

In order to retire rich, you will need to live modestly in your younger years. Maxing out retirement accounts requires the discipline to put money aside rather than spend it. It means avoiding debt, especially high-interest debt from credit cards.

Financial advisers said that some of their best and most successful clients were those that lived humble, non-flashy lives, but ended up with massive retirement funds because of their disciplined spending habits.

Be Born Into It

There are plenty of stories of wealthy people who started with nothing and grew their fortune on their own. But the truth is that many of the world's ultra-rich started off with a certain level of financial comfort, thanks to the success of the generations who came before them. Presidential candidate Donald Trump likes to boast of his wealth, but his father was a successful businessman and loaned him money early on in his career. While he's become a successful businessman in his own right, it didn't hurt to have early loans from wealthy family. Billionaires like the Koch brothers, members of the Walton family, and Lilliane Betancourt all inherited much of their wealth.

A 2013 report researchers at the University of California and London School of economics concluded that entrepreneurs are more likely to be born into privilege. And Global Entrepreneurship Monitor reports that 80% of funding for new businesses comes from savings or from friends and family.

Use Debt Intelligently

Most financial advisers will say that staying out of debt is a key part of building wealth. After all, you can't put money into the stock market if you're too busy paying off high-interest credit cards or auto loans. But there are several instances in which borrowing money may help you build wealth over the long term.

Rafal said using leverage to acquire real estate can be a sound wealth-building strategy, especially with interest rates at historic lows. He also said that if interest rates are lower than stock market returns, most people will be better off in the long run investing their money than paying off debt early.

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