How Do I Start Investing for Retirement? A Guide to Beginning on Your Own
Saving for retirement: one of the least exciting topics to think about. Add to that some financial jargon and an overwhelming list of options to choose, and it’s not hard to see why “saving for your retirement” sticks on your to-do list for too long.
But the dirty little retirement secret it that it’s actually not all that hard to set it up, and once you get it set up, it’s even easier to make monthly contributions and set your future self up for financial success.
This article isn’t meant to be an exhaustive retirement guide. Instead, let’s shortcut your research with three simple steps.
Find the right account
The first step on your retirement savings journey starts with picking the right account. These come in many forms, depending on your employment status and your income. I’ll break down some of the basics, but before we get to that I want to do a quick refresher on what a retirement (or investment) account is.
Personal finance blogger Paula Pant breaks this down in the easiest-to-understand way. Your account is just a vessel, it’s not an investment. She compares it to a cup of coffee — your account is the cup, the investment is the coffee that you put inside of the cup.
Let’s talk about the account (the coffee cup) first before we jump into filling it with coffee.
Employer-sponsored retirement plan
If you’re employed by a company, this should probably be one of the first places you look for retirement options. Why? Employers usually give an incentive to have you contribute to the plan. That incentive is usually free money.
This free money is called an employer match. When you contribute a portion of your paycheck your employer may contribute a percentage as well, up to a certain limit. If your employer matches 100 percent of your contributions up to 5 percent of your salary, you know that whatever you put in, your employer will match up to that 5 percent limit. There’s another benefit to these accounts: the money comes directly out of your paycheck and you’re not required to pay taxes on it until you withdraw.
When people talk about employer-sponsored retirement plans, they usually mention 401(k) plans, but there are more available. You may also hear it called a 403(b) or a 457.
Don’t have access to a 401(k)? That’s OK — there are other accounts you can look into.
Self-employed retirement accounts
There are a few options out there for self-employed persons, but I’ll mention two here: Simplified Employee Pension IRA and Solo 401(k). These retirement accounts offer tax incentives for saving for retirement. You can set aside a portion of your income and invest it in one of these retirement account options.
Traditional or Roth IRA
Need or want to invest in something outside of the options above? The traditional and the Roth IRA are great options for people who either don’t qualify for one of the accounts above, or who have already contributed to their employer-sponsored retirement plan and want to put more away for their retirement.
You can contribute up to $6,000 per year in one of the accounts as long as you fall under the income limits.
IRA’s are also great for rolling over a 401(k) from your previous employer. If you leave your company and have money in your 401(k), but you don’t want to leave it in their plan, you can transfer, or “roll over” your money and have it deposited into an IRA. This is a great thing to do if your previous employer has a 401(k) plan with high fees, or you’d prefer to have all of your retirement money in one place. If you go this route, there are a few steps you’ll want to follow.
Understand investment options
Now that you have your coffee cup, it’s time to pick your coffee. If you don’t pick an investment to put your money into, it will likely sit into your account as cash. That’s a real bummer because the point of these accounts is to help your money grow (or compound) annually. If it’s sitting in cash, it’s not earning money.
Picking your investments doesn’t need to be overwhelming. Here are some options you’ll likely see:
Stock and bond funds
Common investment options that you’ll see for your retirement account are mutual funds (including index funds) and exchange traded funds (ETFs). These investments can throw people off a little, so let’s keep it simple. When you invest money in a fund you’re not buying individual stocks or bonds, you’re buying into a pool that is then going out and buying stocks and bonds — you’ll own a little sliver of a lot of different things.
People generally have a mix of stock and bond funds making up their retirement investments. Stock funds are generally seen as riskier investments; bond funds as less risky. How much you should have in stocks vs. bonds is going to be a personal decision based on factors like how much risk you like to take and how far you are from retirement age.
Target date fund
If picking your own stock and bond funds feels overwhelming, a target date fund is an easy option that your retirement account will likely offer. The idea is that you define the year that you’d like to retire and let the fund auto-adjust as the years go on. The further away you are from retirement, the fund will invest in riskier options (like stocks). The closer you get to retirement, the fund will start to include more lower-risk investments (like bonds).
Now you know the basics of accounts and investments, it’s time to start shopping around. If you’re looking for something outside of any employer-sponsored retirement plan, there are a lot of options for places to stash your cash for retirement. If you’re just starting out, there are two places to look:
Have you heard of Vanguard, Fidelity, and Charles Schwab? These are just a few of the online brokerages that focus on investing in funds while charging some of the lowest fees in the industry. These funds are low-cost ways to invest in a wide range of stocks and bonds. They offer the option to pick your own investments or put your money into a target date fund.
The plus side of choosing one of these online brokerages to open your retirement account is that it’s a very low-cost option. The Vanguard Target Retirement 2045 fund has an expense ratio (fee) of 0.15 percent.
The downside is that if you’re not choosing one of their target date funds, you’ll need to select the funds you’d like to invest in and check in on it every so often to make adjustments — they’re a little bit more hands-on. Another downside is that a lot of these brokerages require minimum balances. For example, Vanguard requires a $1,000 initial deposit when opening an IRA.
New on the scene are investing options through robo advisors. A few you may have heard of are Betterment, Wealthfront, and Ellevest. A robo advisor tries to be a middle option between investing yourself through an online brokerage and investing with a human advisor. To start, you’ll fill out a survey that helps identify your risk tolerance and goals. From that, the robo advisor selects your investments. These investments are usually funds from the online brokerages listed above. While your money is in an account with the robo advisor, it will automatically monitor it and make trades when necessary.
A perk of using a robo advisor is that you have to make fewer decisions and they’ll manage it for you. This perk comes with an additional cost and using these services is more expensive than going straight to the source and getting investments through one of the online brokerages above, though it’s still cheaper than a lot of the other options out there. For this service, you’ll see management fees that start at 0.25 percent per year, in addition to fees charged on the actual investment. That’s still lower than you’ll see with many human financial advisors, which average around 1 percent.
Another perk is that many robo advisors don’t require a minimum deposit to open the account so you can get started with any amount of money that you have available.
This article is an excellent resource to begin comparing your options — including both online brokerages and robo advisors.
Open your account
Once you’ve decided where you’d like to open your retirement account, there are just a few things you’ll need to do. If you’ve decided to open a retirement account with your employer, they’ll have details to help with that.
If you’ve decided to open a retirement account with an online broker or robo advisors, there are some things you’ll want to gather before you sit down. You may need to provide:
- Social security number or Tax ID
- Contact information, including your address, email address, and phone number
- Your employment status and income
- Bank account information (if you choose to fund your account through a bank transfer)
Once you have this information, it should be a quick process to get your account open and ready to start investing.
Starting to invest for retirement can be overwhelming, but by starting with a few basic steps the process can become much more manageable.
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Source : Erica Link