How to Start Investing for Retirement
In this article I am going to share 5 simple steps for how to start investing for retirement.
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How do I start investing for retirement?
I know that when you are first thinking about how to start investing for retirement it can feel really overwhelming. There are a lot of options, and it can be difficult to know the best way to go about it. But never fear—I’m going to walk you through 5 simple steps for how to start investing today so that you will feel confident in investing for your future.
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Why should I start investing for retirement?
But first, before I discuss the 5 steps on how to start investing for retirement, let’s start with a powerful motivator—why.
When you’re young, it’s often hard to worry about the future or spend too much time (or maybe any time) planning for the future, especially for the far-off future that is decades away—because the realities and concerns of the now feel much more pressing and because the future is such a big unknown.
But the truth is that you need to start investing now! And I’ll teach you an easy, low-risk way to do it below. So read on!
The reality is that virtually everyone needs to invest (as soon as possible) to have a comfortable retirement and be able to provide for themselves in old age without working until they die. That’s because investments (good investments, that is) can grow considerably over time, while the value of cash depreciates over time because of inflation.
The sooner you start investing, the longer your money can grow and the more wealth you can potentially build because of the amazing power of compound interest.
Compound interest, simply put, is where the interest you earn on your money itself earns interest. Albert Einstein is said to have called this phenomenon the eighth natural wonder of the world. Compound interest allows your money to grow exponentially over time.
So, for example, let’s say you are the parent of a high school student who was a go-getter and worked every summer and earned $3,000 each summer. And then your rock star daughter invested that $3,000 she earned each year in a Roth IRA where she earned an average 11 percent rate of return on the money she invested.
Let’s say that she then finished college and started a business at 22 and worked in a career that she loved for 45 years, but she never put anything more toward retirement. With only that initial $12,000 investment over those four years of summer jobs, she would retire with $1,547,573.59 in her Roth IRA account. And that’s if she never contributed another dime!
Now, I know that a million dollars isn’t what it used to be, and it won’t be worth in 45 years what it’s worth today, but the fact that you can earn that kind of money without having to physically work for it is simply awesome.
What should I invest in for retirement?
One of the important things to consider when determining how to start investing for retirement is what types of assets to invest in. There are many ways that you can invest, such as buying stocks, buying real estate, and buying a business, but by far the easiest and least risky way to invest of these options is to invest in mutual funds.
A mutual fund is a collection of assets that is professionally managed as a portfolio of investments. With a mutual fund you and many other people buy into the collection of assets, and so you “mutually fund” that portfolio of investments.
Mutual funds are made up of assets like cash, money market accounts, stocks, and bonds.
A money market account is a high-yield, high-minimum-deposit savings account.
A bond is where you buy the debt of a company or municipality, and they pay you back with interest.
A stock is where you buy a small piece of a publicly traded company, such as a technology company, automobile company, or food company. So, for example, you could buy a stock from Coca-Cola, Walmart, or Ford.
And stock mutual funds are mutual funds that are made up primarily of stocks.
When comparing cash, money market accounts, bonds, and stocks, long-term the asset that will make you the most money, based on past performance over many decades, are stocks. That is because they have more inherent risk than the other three options and therefore higher potential reward.
However, mutual funds really aren’t that risky because you are investing in a wide variety of different companies, rather than buying stocks from a single company (that could go bankrupt, for example). Buying single stocks is what is really the risky venture, but investing in mutual funds is fairly safe as long as you are willing to keep your money invested long term.
As one of my favorite financial experts says, you won’t get hurt on a roller coaster unless you jump off. I am a fairly risk averse person, but I am completely comfortable investing in mutual funds with good long-term (at least 10 years) track records, and you can be, too.
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5 simple steps for how to start investing for retirement
As you can see, there are a lot of options when it comes to investing for retirement. But the KISS (keep it simple, sweetie) principle applies with investing, just like it does with many other aspects of your finances. Here are five simple steps that you can follow to help you know how to start investing for retirement.
1. Create a budget so you’ll know how much you can save (and should be saving) for retirement.
The first thing you need to do when starting to invest for retirement is to determine how much you need to save toward that goal. And the way to do that is to create a budget (or evaluate the budget you have) so that you’ll know how much you should be saving.
Most financial experts recommend saving between 10 and 15 percent of your income toward retirement. I recommend that you invest the greater amount—that you start to invest 15 percent of your income for retirement as soon as you can. And if you do that over the course of a 30- to 40-year career, you should have a very comfortable retirement. (But check out this article to find out how you can retire much sooner than that! #retireearly)
2. Take advantage of your company’s retirement match.
If you work for a company that offers a 401(k) or Roth 401(k) and that will match your contributions to that plan, then save the amount up to the full match in your company’s retirement plan.
If your company doesn’t offer a match or you are self-employed, then you can save with a Roth IRA, at least until you max it out (at $5,500). (Unless you have a really high income; then you will likely have to invest in a traditional IRA—which you can then convert to a Roth IRA.)
The reason I recommend investing in an IRA rather than an unmatched 401(k) is that you generally have a lot more available mutual funds in the IRA, and so you should be able to earn a higher return than you could in your 401(k).
After you invest the $5,500 in your IRA and max it out, then invest the rest of the money you have budgeted for retirement, till you get to 15 percent, in a 401(k) or similar account if you can, even if your company doesn’t offer a match.
3. After reaching the company match, invest in a Roth IRA.
As mentioned just above, after you have invested enough in your company’s retirement plan to receive the full match, then invest the rest of your money budgeted for retirement in a Roth IRA. You can invest up to $5,500 in a Roth IRA (and an additional $5,500 in a spousal IRA!). We have been investing our money for our Roth IRA for years with a brokerage firm called Schwab, and they have been a great company. Vanguard is another great option.
Once you start investing for retirement, I recommend that you check out a great free app called Personal Capital in order to track your progress toward reaching your retirement and other financial goals. With Personal Capital, you can see not only all of your bank checking and savings accounts and even your credit cards and other finance accounts, but you can also link your retirement and regular nonretirement brokerage accounts.
This allows you to have a complete, overall picture of your current financial situation. And you can also view your account history to see how your accounts and overall portfolio have done over time. I love this very helpful tool and use it all the time! Sign up for your free Personal Capital account here.
Check out these related articles:
How to Become a Millionaire by Investing Just $200 a Month!
Roth or Traditional IRA—Which Is Better?
How to Save Enough Money to Fully Fund Your Roth IRA
How to Retire Early: 11 Simple Steps to Make It Happen!
4. Determine where (which brokerage firm) to invest in for your Roth IRA.
Even though I heard the advice to open a Roth IRA within a few years of when I started to invest for retirement, I am sad to say that I didn’t actually open a Roth IRA until several years later. And then worse than that, I didn’t actually start funding it until a couple of years after that! Isn’t that crazy?
And the reason was that I didn’t know how to do it and opening a Roth IRA seemed daunting. It wasn’t until I finally realized how big a difference being able to choose your own mutual funds can have on the rate of return of your investments that I finally took the plunge to open a Roth IRA.
Note: It can make a big difference! if you invest $10,000 in a mutual fund for 10 years that gets an annual average rate of return of 12 percent versus one that gets an average rate of return of about 8 percent, you will actually earn during that time at least $10,000 more from the fund that earns 12 percent. So this is a big deal!
So I strongly recommend that you open a Roth IRA as soon as you can. And it takes only about 10 minutes! (Can you believe I procrastinated that long over a fear of learning how to do something that takes 10 minutes?!)
My husband and I have accounts at both Schwab and Vanguard, and both are good companies, but our preference is Schwab. (For one thing, you can generally start investing with Schwab with less money than with Vanguard.)
Note: I am not an affiliate with either brokerage firm nor am I associated in any way with either one (I do not get compensated in any way by either company if you open an investment account with them); they are just two good companies that you could choose to invest with.
Fill out the form below and I’ll email you a simple cheat sheet that will give you the exact steps to open a Schwab retirement account in 10 minutes or less. So let’s do this!
5. Determine which mutual funds to invest in in order to adequately diversify your retirement account.
When you begin investing for retirement, invest in good mutual funds (with good long-term track records) from four main categories: large-company stocks, mid-size company stocks, small-company stocks, and international stocks.
This will help ensure that you can benefit from the growth of all these different sectors and that you don’t lose all of your money when one of these sectors declines for a time. One of my favorite financial experts, Dave Ramsey, recommends a simple formula of investing 25 percent of your money for retirement in each of these areas. That’s what we have done for more than 10 years now, and it has worked well for us.
Would you like more guidance on how to start investing for retirement?
I know that when I was first trying to figure out how to start investing for retirement I really wished there was someone who had my best interests at heart (and not their commission rate) who would just hold my hand and show me the best funds to invest in and why.
And that’s why I will email you and share with you exactly how we choose the mutual funds we invest in (for free—no strings attached) by entering your email address below.
With these 5 simple steps on how to start investing for retirement, you will be able to start investing in order to save for your retirement and an awesome financial future!
Want even more help on investing? Learn 9 simple steps to become a millionaire by investing just $200 a month! And learn how to have enough money to fully fund your Roth IRA here.
What questions do you have on how to start investing for retirement? Or what advice do you have? I would love to hear your thoughts! Leave a comment below!
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