5 Simple Strategies for Retirement Investing
Investing for retirement can be intimidating, especially when first starting out. With hundreds of tips and suggestions, and even more investment options, many people procrastinate because they simply do not know how to begin. Earlier this summer I was asked to submit a retirement investing tip for an article in US News and World Report. Ironically, just within the last few months, a niece and two of my nephews (ages 20-23) each asked me how to get started as well. I shared these five simple strategies with them.
#1 Start early!
The earlier you begin investing for the future, the more you will have when retirement day finally arrives. For example, consider two twin sisters, Ann and Beth. Both invest $5,000 per year until age 65 and both get an average annual return of 8%. Ann starts investing at age 25 but Beth waits 10 years to start at age 35. At retirement age, Ann has more than double the amount of money as Beth - $1.3 million to Beth’s $566,400. By harnessing compound interest, where interest is applied to accumulated growth in addition to the original investment, Ann's money has significantly more growth. Consider investing 10% of your gross income, with a goal of increasing it to 15%, or even more. If 10% is too much when you’re younger, just start with 3% or 5%. The most important thing is just to start!
#2 Understand the difference between savings and investing.
Before investing for the long-term, a good rule of thumb is to set aside approximately three to six months’ worth of income for possible emergencies. This short-term money is considered “savings” and should be easy to access on short notice. A savings account at a bank or a money market mutual fund are good places to keep savings. This money will allow you to cover unforeseen expenses (broken washer, roof repair, car trouble, etc.) without blowing your budget. It will also keep you from tapping into your long-term investments.
#3 Take advantage of employer sponsored retirement plans (401k plans or 403b plans).
These plans offer great tax incentives and provide an easy way to automatically invest on a regular basis. At a minimum, invest enough to receive whatever “matching” your company offers. It’s free money! Individual Retirement Accounts (IRAs) or Roth IRAs are other good options if you don’t have access to a retirement plan at work.
Consider investing in a diversified stock mutual fund, such as an S&P 500 index fund. Over the long-term, stocks have provided better rates of return than bonds, CDs, real estate and gold. Also, time can reduce the risk of investing in stocks, especially when retirement is decades in the future.
#5 Stick to your plan.
This may be the most important tip of all. Simply stick to your plan. Ignore the noise when financial markets inevitably go up and down over time. Keep investing on a regular basis (every paycheck works great) regardless of what the market does. Live within your means by creating a savings plan for short-term emergencies, and an investing plan for the long-term. Once those plans are in place, you can comfortably enjoy the remainder of your paycheck knowing you are already taking care of the future. So, start early and follow your plan.
Still have questions? No problem. Every individual’s situation is unique and we’re happy to assist you with your comprehensive financial planning needs. Reach out today!
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