Saving for retirement isn’t hard. Getting started is.
I can teach you how to start saving for retirement so it isn’t intimidating or painful.
So, as a former spender in $206k of student loan debt, I am here to tell you that if I can turn my finances around and get going saving for retirement, so can you.
The sooner you start saving for retirement, the better.
Example: At age 28, a $100 per month contribution ($1,200 annually) at a 3% annualized rate of return, will turn into nearly $80,000 by age 65. If you start at age 38, this same investment amounts to just $50,000. If you start at age 48, this same investment amounts to just $26,000. And we can all hope that the rate of return is much higher than 3%!
If you’re not convinced, here’s an investment calculator – see for yourself.
Now, that you know your future depends on it, here’s a look at how to save for retirement.
1. Determine your investment goals
Ask yourself why you are investing. Is it for retirement? Is it for a long-term goal? Is it for the short-term? Or is it just for fun to learn how to do it? The answers to these questions matter significantly because they require different investing strategies.
If you’re investing for the long-term (e.g.: for retirement), then you can move forward with opening a retirement account that helps you serve this goal. But if you are dabbling in investing for a short-term goal, you should not use a retirement account for this purpose.
2. Create an investment strategy
Once you’re sure you’re investing for retirement (i.e. for the long-term), you need to decide what “investment strategy” you want to take.
Don’t let the term “investment strategy” intimidate you. Investment strategy just means the rules by which you want to invest. It means that you will create somewhat of a plan and stick to that plan while you invest.
A couple questions to think about in this space to get you started: 1) how much money will you be investing, 2) how often will you invest (look up “dollar cost averaging”), 3) what period of time are you planning on investing for (20 years, 35 years?), and 4) what is your risk tolerance like (can you handle the ups and downs of the market?).
Once you get a sense of the answers to these questions, write them down and keep them handy as you open retirement and investment accounts. They should help guide you to make better choices. For example, if you’re investing for the long-term and for your retirement, you will want to learn about mutual funds, index funds, and how they differ from investing and trading individual stocks.
3. Invest in your employer’s retirement plan
If you want to save for retirement, generally, a good place to start is your company’s retirement plan. Your company may offer a 401k, 403b, or 457. If your employer offers an employer match, this is a no brainer – do not pass up free money!
Even if your employer doesn’t have a match, it’s often a really good place to start because it’s easy. You can contribute directly out of your paycheck and the platform is generally set up for you.
Typically, I think your employer’s retirement plan is the best place to start saving for retirement.
4. Open a Traditional IRA or Roth IRA
A second way to save for retirement is through an IRA or Roth IRA.
If your employer doesn’t offer a retirement plan or you want an additional plan, you can invest in a Traditional IRA or Roth IRA.
A traditional IRA is a retirement account that you contribute to with pre-tax dollars, making it a potentially great tax-advantageous vehicle if you are eligible to take the deduction (but not everyone is). Generally, your money will be taxed in retirement, when you take distributions from your IRA (both your contributions and earnings will be taxed). There are certain contribution limits to IRAs. In 2017, if you are under 50, you can contribute up to $5,500 annually ($6,500 if you’re over 50).
Similar to a Traditional IRA is a Roth IRA. A Roth IRA is the same vehicle as a traditional IRA, except certain rules apply. You can only contribute to a Roth IRA if your income is below certain limits. If your income is above those limits, you have to use a traditional IRA. Roth IRA contributions are never tax deductible, but you’re not taxed on the money when you withdraw it in retirement (which is amazing).
5. Open a brokerage account
Finally, once you have maxed out investing in your employer-offered plan and/or an IRA/Roth IRA, you can open your own brokerage account.
This is the last step in the process. The option generally you’d want to look into after you’re maxing out the previous two options.
In terms of where to open a brokerage account, you have several options (Charles Schwab and Fidelity, for example). Choose a reputable one, so do research.
A Final Note!
Retirement can seem so far away. But the sooner you start saving, the better off you’ll be in the long run.
Take one small action today that can move you toward saving for your future. If you’re still not sure where to start, I recommend reading Retire Inspired by Chris Hogan. The book is suuuuper helpful and can guide you through saving for retirement.
Whatever you do, do something to save for your future. You won’t regret it!