Saving for retirement can be an incredibly daunting task. However, unless you were born into money or won the lottery, saving for retirement is basically mandatory.
The path to investing for retirement is only made more difficult by the complicated and confusing language surrounding retirement accounts.
Much of the literature available in terms of personal finance and investment is designed for people who are already familiar with all of the crazy words and acronyms.
How is the average person supposed to know the differences between a traditional IRA, Roth IRA, and employer-sponsored 401k plans – especially if your employer offers both traditional 401k plans and Roth 401k plans?
That’s why we’re taking a look at the basics. You deserve to have a comfortable retirement, and it’s totally within your reach!
With that, let’s get to it. Congratulations on taking your first steps towards saving!
Table of Contents
Finance for Beginners: The Retirement Savings Edition
When it comes to investing for retirement, it’s easy to think that you have waited too long. However, nothing could be farther from the truth.
Sure, it would have been best to start building your retirement savings when you were a toddler. But you didn’t, and no one does.
It’s totally natural for the idea of saving for retirement to induce a lot of anxiety. In reality, though, the worst thing you can do is do nothing at all.
It isn’t about making perfect decisions that give you the highest possible return on your investment. It’s about simply getting started and realizing that the sooner you start, the less you will have to save in order to meet the retirement goals that you have.
Don’t let the feeling that you should have started a long time ago keep you from preparing for your future. Remember the popular Chinese proverb: “The best time to plant a tree was 20 years ago. The second best time is now.”
Investing For Retirement: How to Begin
If you are earning an income, then you pay Social Security taxes. Unfortunately, though, according to the Social Security Administration, Social Security benefits are expected to be depleted by the year 2034.
What that means is that it is not clear if or how Social Security benefits will cover the cost of living in the future.
One important thing to know is that many businesses and the government offer incentives to save money for retirement.
You can put money away into qualified retirement plans in order to lower your tax bill and allow the money to accumulate tax-free for decades.
Qualified retirement plans include an individual retirement account (IRA) or a 401(k).
Oftentimes, employers will also contribute funds to your retirement account if you are contributing to a retirement account. This is basically free money, so it’s a good idea to maximize this opportunity if you have it.
Challenges You Might Face at the Beginning
If you haven’t started saving retirement funds yet, you aren’t alone, it’s common for people who haven’t started saving to think that they don’t have enough money to put away for later as they are struggling to meet day-to-day expenses.
However, you need to change your perspective. It should be just as much of a priority for you to pay yourself as it is to pay other people. Of course, you don’t want to leave bills unpaid or default on loans, but it should absolutely be a priority to take care of yourself.
There will likely be months when you don’t have very much to save. You also might find that you are limited in your investment choices if you’re saving via your employer’s 401k. Rather than becoming discouraged, it’s important to commit to saving as much as you can as frequently as you are able to.
It is a reality of the personal finance industry that it is built around catering to incredibly wealthy people. Banks and brokerages are more motivated to deal with fewer people who have more money than more people that have less money. Regardless, your retirement plans should be built around your own needs rather than the needs of a bank or a brokerage.
Even as little as $250 for $500 in savings for retirement is a good start. When you start saving, you start establishing a habit. There are a number of brokers now that offer no-fee, no-minimum retirement accounts. The most important thing is to be consistent and make it a habit.
You’ll want to do what you can in order to set yourself up for success. For instance, it’s a good idea to save a little every month rather than trying to make a yearly contribution to your IRA that you scrape together all at once.
For example, setting up a Roth IRA outside of work is a great idea so that you can invest in what you want without interference from your employer.
You can contribute up to $6,000 a year if you’re 50 or younger and $7,000 if you’re older than 50.
For a 45 year old, that’s a monthly max contribution of $500 and you can just link your bank account and have that amount transferred every month. Super easy and convenient.
Select a Brokerage
There are a lot of different brokerage firms that you can choose from. These days, a lot of national brokerages will allow people to open small accounts that don’t have minimums or fees. Large brokerage firms tend to have a large selection of investment options and tend to be reasonable and transparent with their fees.
Also, if your needs change over time, these firms typically have the infrastructure to offer you more services in the future.
You’ll want to do your research rather than simply choosing a brokerage on a whim. It will eat into your savings if you switch firms repeatedly, as many firms will charge fees for transferring accounts.
Understand the Risk and Be Realistic
When you are investing, it’s important to understand the risk that you are taking on. However, when you are starting with small amounts of money, the most conservative investments likely won’t amount to much in the way of savings in the future. At the same time, you don’t want to invest in some of the riskiest areas of the market only to find your savings disappear right away.
A good place to start is with a basic index fund. It’s important to understand that there is always a risk that the price will fall. However, the stock market has averaged a 9.1% return annually for the last 30 years so don’t worry too much about it.
Your First Investments
You will likely start out with index funds aka ETF’s when you are a new investor. With little cost and hassle, you can invest practically any amount of money into these types of investments. Because these funds allow you to buy tiny stakes in a large number of different stocks at once, you are more likely to see positive returns.
In recent years, index ETFs have become pretty popular. It typically takes a small annual fee and an initial commission in order to invest in these.
You shouldn’t write off individual stocks, however. You can enjoy higher returns and a better performing portfolio when you’re choosing solid stocks and that’s the basis of what we teach here at My Money My Freedom.
Build Your Savings Habits and Accumulating Wealth
Instilling a habit of saving is one of the most important parts of investing for retirement. It’s amazing how habits can take hold over time and become practically second nature. You also might find that your income increases over time and you are able to save more.
As you are able to save more and your investments increase in value, you might decide that it’s time to get serious about building a portfolio that will produce passive income in addition to stock gains.
That’s when you’ll need to start buying individual stocks, instead of low-yielding funds. To start this, I usually recommend waiting until you have at least $5000 in savings as a minimum.
With individual stocks, you’ll need a system and a plan to make sure you’re setting yourself up for future financial success. You make a LOT more money with individual stocks, but if you don’t know what you’re doing, it’s easy to screw it up.
As you have more money at the end of each month while your earnings increase, do what you can to max out your contributions to your retirement account.
Finance For Beginners: Saving For Retirement Is Entirely Within Your Reach
This finance for beginners guide to retirement savings has been designed to give you a simple, no-fluff look at the world of retirement funds and investment. As you can see, it’s not nearly as daunting as it seems! So why not start paying yourself starting today so that your future can be everything you want it to be?
Is it time for you to start your journey towards retirement saving? If so, sign up for our Infinite Income retirement planning case study and see how we can help you create a plan that produces all the retirement income you need to live your best life for life!