Personal finance can be super confusing. Sometimes, it can seem like there is an overwhelming amount of information. Then, when you add in emotions like guilt for not starting earlier, or the fear that you aren’t smart enough to do this, it just makes it worse.
Even though I had done some investing, for a while, I was still putting off really diving into how retirement saving works. I had grown up seeing my grandfather investing a lot when I was younger. So I really didn’t have this fear of investing in the stock market. Then, when he started teaching me the ropes of investing, I was able to witness my investment plunge in 2008. I left it and watched it steadily grow back to its original value.
I want to try to explain how it works to save for your retirement and try to simplify the information that you really need to know to get started.
There’s a few things that you can do that will set you up for a great retirement, and they aren’t complicated or sophisticated!
3 Steps to Save for Retirement
1. Pick a retirement account.
I spent some time here talking about knowing which vehicle you should pick for your retirement savings. Remember, the reason we have those retirement savings accounts is that they give us a tax benefit when we save for our retirement.
So if you have a company 401k or 403b, you’ll invest in that up to the company match. You want to maximize your savings by getting that free money.
Then, invest in your Roth IRA up to your yearly savings limit.
If you still have money that you want to save, go back to your company’s 401k or 403b.
Notice that we’re just talking about accounts here. We haven’t actually chosen what stocks or mutual funds that you’re investing in. That’s the second step.
2. Picks funds to invest in.
I am going to make this incredibly easy for you here.
You don’t have to be super sophisticated when it comes to your investing.
I know that it’s easy to feel overwhelmed by the choices that you can go with, which means that it’s very likely that you won’t do anything at all.
To start, all you need to invest your money in is a target date fund.
That’s it.
If you don’t know anything about investing, put your savings in your retirement account in a target date fund. As you learn more, you can definitely get more sophisticated.
But the biggest factor in saving up a great nest egg for retirement is going to be the action of you saving day in and day out.
I won’t go in depth on how mutual funds work or how an index fund works here. The biggest thing you need to know is that the target date fund is like a super index fund that combines all your recommended investments into one. single. fund.
All of the major players like Schwab, Fidelity, and Vanguard have their own version of the target date fund. You simply choose the fund that has the date closest to the year that you’re planning on retiring. That’s because the fund automatically adjusts it’s invest mix for you as you get closer to retirement.
If I were to start fresh today and I didn’t know anything else about investing, then I would put my retirement savings into my target date fund.
Are there some ways to maximize your investing that more closely align with your individual situation?
Yep.
Are there some ways to be more sophisticated and still get the maximum benefits without any of the work?
You bet there is.
But this is what I’d do first.
Whether you follow me and learn more from me, or dive into some other great sources out there, there is a lot to learn. Depending on your interest in this, you may want to learn way more. I did. But starting over, choosing the target date fund for your investments sets you up to be in a perfect spot.
If the market crashes, that’s totally ok, leave it alone. It will come back. I’ve seen it.
The great thing about this fund is that you’re very well diversified and protected against upheaval in individual companies.
The great thing about this fund is that it’s like the mythical hydra. If one major company goes down, three more will rise to take its place.
The truth is, if this fund were to really tank for good…I’d be more inclined to think that you need a moat around your house and canned food.
3. Automate your savings
Once you know how you’ll funnel your dollars into an account that works for you, and you’ve chosen the fund that you want to invest in, you need to automate those savings.
If you are going through your 401k with your employer, you will be able to set that up to automatically come out of your paycheck before you can even get to it.
That’s perfect. You will just learn to live without it and your retirement will grow and compound each month without you even really paying attention to it.
If you forget about it, that’s perfect.
If you’re investing in your Roth IRA, that means that it will hit your bank account before going to your investment account. Here also, I would go to your settings in your online investment account and set it up where it automatically pulls the amount that you’re wanting to invest each month and invest it into the fund you’ve chosen.
Choose to have your Roth IRA pull money from your bank account as soon as possible. You don’t want the money that you invest to be the money that’s left over after spending each month.
Remember, let’s be intentional with where we want our dollars to go each month.
So budget your money before you spend it, and set that automatic draft so that it pulls your money before you’ve had a chance to spend it using your more immediate emotions.
How much should you save?
You can get legalistic here. Try to invest as much as you can.
You’ll find recommendations run between 10%-15% of your gross household income. Dave Ramsey recommends 15% and I would echo that advice.
But you need to save as much as you can. If you can’t save that much today, can you save half of it? Just get started, and you can look at raising that rate every year you work.
Just get started, you’re way better off saving what you can over throwing up your hands and saving nothing because you feel like it isn’t perfect.
Investing can be Pretty Simple
Investing doesn’t have to be that complicated at all.
Sure, you can learn more as you go, but this is a solid plan to get you out the gate.
Remember, the people that are going to be the best off in retirement are going to be the people that got started.
To review, pick which account you want to invest in.
Your work 401k up to the company match.
Then, a Roth IRA that you set up from a company. Vanguard, Fidelity, and Schwab are all great options.
Want me to choose for you? Go with Vanguard.
To get started, invest in a target date fund today. It’s a fund that’s already well diversified and is completely acceptable to have all of your money invested into this single fund. Do not pull your money out of the market if it starts going down. I’ve seen the market drop and I’ve seen it recover. It will recover.
I love the saying by Dave Ramsey that says, “The only people that get hurt on a roller coaster are the ones that jump off.”
As you learn more, if you want to change up the way you invest, that’s great! This is a great strategy if you’re getting started.
Lastly, set up automated investing so that you aren’t making a decision to invest each month, it’s just done for you.
Action Steps
It’s time to get going on your investing. Here’s what you need to do this week.
Open a Roth IRA from Vanguard, Fidelity, or Schwab.
Check out their page on investing in Target Date Funds.
Trust in your ability to figure this out. If you need help in getting set up, contact them. That’s what their customer service is there for, and they can help you with the nitty gritty of getting it set up.
But you can do this.
Remember, get started.
I’ve got so much more to cover with investing and you can actually help shape the information I cover in the future. Is there anything you could use help with? Send me an email at [email protected] and I might cover the topic you could use some help with in a future article. Just let me know, I’m here because I’m wanting to help you out.
Disclaimer: All investing is subject to risk. I am not a financial professional. The ideas contained in this blog are strictly for educational purposes. You assume full responsibility for any actions you take.
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