Retirement planning is an important topic for anyone who has been in the workforce. But when it comes to personal finance, saving and investing, knowing the right approach and executing that plan can be a daunting task. But it doesn't always have to be.
What retirement strategy is right for me?
There is no cookie-cutter way to achieve retirement goals, given that everyone’s situation may be different. But the value of time is the one advantage that is universal. If you’re like me, you’re not independently wealthy. So the option is to set aside money today to ensure that, say, 10, 20 or 40 years down the road, there is enough money set aside to allow one to live the retirement lifestyle they desire. This shouldn’t be an option. For a lot of people, it's mandatory.
If the title of this article has drawn you towards the information, hopefully it means that you have already adopted the basic premise that saving money is not (or should not be) an optional exercise. The cost of living increases each year, which means your dollar has to stretch farther to keep up. What’s more, it’s anyone’s guess what Social Security will look like in the next 15 years, much less when you reach retirement age, if you're on the younger side.
And even if we were to assume Social Security will still exist in the future, do we really know how well its benefits will cover the cost of living in, say, 2035? The good news is that whether you are self-employed, a contractor, an employee, we have the tools in place to minimize the risk and any uncertainty about the future. The U.S. government, and for that matter, many businesses, provide tons of incentives for everyone to save for retirement.
Think about this: Setting money aside from your paycheck that goes into an IRA or 401(k), which are examples of qualified retirement plans, can grow in value tax-free for several decades. And doing so allows you to get a lower tax bill during that year. What’s more, if you are lucky enough to work for a company that will match dollar-for-dollar your retirement contributions, this, in essence, serves as free money. This is money you wouldn’t have received otherwise. Think of it as a raise. So why would you not take advantage of these tools?
What’s holding me back?
For a lot of people who are already struggling to get by, there is the belief that they don’t have enough money today as it is. And attempting to save for retirement would further strain their ability to live for today. Indeed, there are legitimate obstacles towards saving, especially when bills are due. But paying yourself, in my opinion, should be just as much of a priority as paying other people. The reality is, if you don't take care of yourself, who will?
Starting small with, say, $250 or $500 in retirement savings, is more effective than not starting at all. And putting a little bit of money aside each month, say $25 or $50 deducted from your account every pay period will help you not only establish the habit of saving, it will also help you develop (and fine-tune) a process for saving. And if you can automate the process it will be even better. So, how do you start?
How can I start saving?
There are several online saving/retirement brokerage accounts, with reasonable fees, that will allow you to automatically deduct a set amount of money every month from your regular account. And if your employer offers a 401(k) program, you will be able to have deductions made automatically from every paycheck that goes into that online account.
But here’s the thing: As the saving amount grows, your resolve will be tested. Allowing to grow and not tapping into it, unless for “extreme emergencies,” will require prudent thinking and a commitment to your long-term retirement goals.
Another thing to consider is investment risk and how those funds are being distributed within the portfolio. Risk and reward goes hand in hand. Sure, you’re starting off small, but if you invest aggressively, that small amount can grow also aggressively. At the same time, new retirement savers should seek to avoid risky areas of the market that are known for extremely high volatility. These might include young biotech companies, highly leveraged mutual funds and commodities such as gold. Destroying your initial savings as soon as you start can derail the experience.
What should I invest in?
From my personal experience, a basic index fund — one that matches a popular index like the Dow Jones Industrials or S&P 500 would be a wise move. Sure, that’s not to say this strategy is risk-free. But it’s safer in the sense that, not only does a basic index fund improve your odds of attaining a reasonable rate of growth, it ensures that your money won’t be wiped out even if things were to go sour.
Other investment vehicles such as ETFs and mutual funds, which allow investors to put in any amount of money they can afford, can also provide a low-cost way to save. These vehicles will allow investors to acquire small amounts of shares in, say, hundreds of companies for as little as $500. This immediately provides a strong measure of diversification, allowing investors a better chance of earning solid returns, while minimizing the chance of major losses.
Of course, this method is not going to allow you to tour the world in your retirement — at least not right away. And that sailboat you wanted to live in during retirement will take a lot more time. But by starting small, you have established good saving habits. More importantly, you have begun to save for retirement.