Investing for retirement can be very confusing. You may know that you should be doing it, but you may be so confused on how to do it that you don’t even bother. Hopefully, this article will give you the basics so that you will feel empowered to at least get started.
Who: The obvious answer of who should be investing is you, of course. But, who do you talk with to get started? Who can help you? If your company offers a 401k plan, then you can start by talking with the human resources department. They will either be able to get you the paperwork or send you to the benefits department to get it. If your company does not offer a 401k plan, then you need to seek out a licensed investment broker. The best way to do this is through a referral. Ask your friends or family who they use (or you can ask a non-biased financial coach!). The key here is to find a financial adviser with the heart of a teacher who will not speak down to you, but instead make sure you understand what you are investing in.
What: What amount should you be investing for retirement? The ideal number is 15%. So, if you make $4,000 per month, then you should be investing $600 per month. If for some reason you feel like that is impossible right now, then you should do a minimum of 10%. If you have a bunch of debt, along with the payments going out that comes with that debt, then it is going to be tough to invest that much. See “when” below:
When: When should you start investing for retirement? You may think that my answer is right now. However, that is not necessarily the case. You should start investing in your retirement after you are completely debt free (except for a home mortgage) and have a fully-funded emergency fund (which means 3-6 months worth of expenses). Intensity is key here. If you take ten years to get out of debt and get your savings in place, then that is too long. You have to get radical and eliminate your debt so that you can take advantage of compound interest as soon as possible.
Where: Where do you put the money? It somewhat depends on what your options are. If you have a 401k available at work with a match, then you need to put money in that first. Put in enough money to take advantage of the full match from your employer because that is free money! If you still have some of your 15% left to invest after you get the full match, then put the rest into a Roth IRA. If you still have some of your 15% left after maxing out your Roth IRA contribution, then go back to your 401k and put it in there. So, let’s summarize that: 1) Put the maximum amount you can into your 401k where you will get a match from your employer 2) Then max out your Roth IRA 3) Then more into your 401k. If your employer does not offer a 401k ,then just go straight to the Roth IRA.
Why: Why should you save for retirement? The basic answer is because you have to. Unless you plan on working until the day you die, you are going to need a source of income when you retire. I am certainly not counting on social security to take care of me when I retire. Not only is it a financial mess, I believe that you can do much better investing your money than relying on the government to take care of you.
How: Once you open a retirement account (401k or Roth IRA), how should you invest the money? I recommend spreading your investments into four types of growth stock mutual funds: growth, growth and income, international, and aggressive growth. If you are more conservative, then you can trade out a balanced fund for the aggressive growth. The key is to look for (or have your broker look for) funds that have a long track record (at least 10 years) of averaging 12% growth per year. Do not let anyone tell you they aren’t out there because they are, even after the recent economic downfall.
This is not an in depth look at everything there is to know about retirement savings. There are whole books about that. My hope is that you now have the basics to take action. Don’t get to retirement age wishing you would have started investing decades ago.
What questions do you have about retirement investing?