While exact data is difficult to obtain, it is clear that every year thousands of people face retirement with little or no money beyond Social Security. Those who do have some other retirement money for the most part have far too little.
Social Security alone is barely enough for survival, even with the help of government assistance of various kinds (such as low income housing). For this reason, it is absolutely essential for us to take seriously the need to provide for our future with solid retirement or financial freedom income planning.
When to Begin Your Retirement Plan
Possibly the most neglected opportunity in the financial world is that of beginning retirement funding at an early age. The difference in starting just a few years earlier can be incredible.
To best understand this read my article on the Rule of 72. It includes a chart showing the growth of $1,000.00 invested at 11% growth, the average over time of the stock market index fund.
You will see that in this case it takes 6.5 years for it to produce a second $1,000.00. And it takes over 30 years to grow to $32,000.00. But after 60 years it is producing over $100,000.00 each year!
Note:
Possibly the most neglected opportunity in the financial world is that of beginning retirement funding at an early age.
Alternately, investing $200.00 per month over time will be producing a similar amount inside of 40 years. This all points to the clear truth that retirement income needs to begin as early in life as possible.
Best Way to Invest for Retirement
First, watch out! The financial world is filled with opportunities to lose your shirt. There are many dangers when it comes to long term investing for retirement. Two of the worst areas are annuities and even worse, anything associated with insurance.
There are a couple of first choices and in my mind they exceed the potential and safety of everything else so far that I recommend most people look no further. First is the employer 401k and second is the Roth IRA.
When a 401k program is available give it first consideration. Not all programs are advantageous. Look for programs that are diversified (ones invested totally in the employer’s company are dangerous—remember Enron).
But most important look for matching funds. This is what makes some programs stand out. If the employer will match your contributions, you will most often want to contribute to your 401k up to the amount of the employer contribution.
Either as your first choice or as your second after getting matching funds in the 401k, look for a Roth IRA. There are many advantages to a Roth, but the most important is that the earnings will be withdrawn tax free. Don’t be duped by the fact that you can deduct contributions from income in other retirement plans. If you make significant contributions to your IRA the taxes on withdrawal later will be much more.
Where to Invest Retirement Money
Obviously there are many places where you could invest your money in a retirement fund. How can you know the best option?
Before you decide, learn a little about the process. Start with the concept that anything being advertised is being sold. Don’t be sold anything. Decide to buy what you want instead.
The cold truth is that investment companies are highly motivated to sell you plans that make them the most money, not what does you the most good. Sure there are good investment advisers, but it is up to you to figure out who they are.
Next, remember that when you invest in a no load fund, all your money is invested. Put in a hundred and you start with a hundred in the fund. In a load fund, put in a hundred and you start with several dollars less so you earn on less.
More important from my point of view, is that sixty percent of funds under perform a total market index fund or Standard and Poors 500 index fund. And they all vary from year to year. So you are betting against the odds to choose anything else.
Note:
I personally recommend total stock market and Standard and Poor 500 index funds for basic retirement investing.
For that reason I personally recommend total stock market and Standard and Poor 500 index funds for basic retirement investing.
Which company is best? Two companies that I have worked with personally and consider to be solid companies are Vangard and Fidelity. There are other companies that are good, but these are ones I feel comfortable recommending.
How Much to Invest for Retirement
This would appear to be an easier question to answer than it is. There are just too many variables.
You need to calculate a cost of living for yourself. Start by figuring what it would cost you to live now. Your lifestyle will be different than anyone else’s. Will you own your home outright or will you rent? Where will you be living?
Next you can think about the increases you need to allow for inflation. Numbers will be inexact, but project what you think may happen. Think about the number of years before you would want to retire.
If you want $50,000.00 a year and can earn 10% then you need $500,000.00. If you can only earn 5% you need twice as much. Allow more for keeping the fund growing, not depleting from use. Allow, too, for the fact that at some point you will probably want to turn your investments to something safer at a lower rate of return.
Project how much you need to invest every month to reach your retirement goal. Then set up your account and start investing.
In the end, you have to make an educated guess and work with it. Some people prefer to just commit to some percentage (often 10%) of their income. As long as it is a reasonable amount based on your age and income level you will do well.
Start Investing for Retirement Today
There is an old saying that people get too soon old and too late smart. In no area of life is that truer than in relationship to building our retirement fund. Then we find it to be a real challenge.
No matter how old you are, but especially if you are young, my strongest recommendation is for you to get started today building your retirement savings if you are not already on your way.
