George Manning writes about personal finance and investing strategies to prepare for retirement.
If you’ve never invested for retirement before, whether you’re 25 or 45, it’s not something to jump into haphazardly. You have myriad options at your disposal, all with different advantages and disadvantages. Regardless of your age, though, setting aside funds for your sunset years in an absolute must. Government programs such as Medicare and Social Security may not be enough for you when it comes time to call it a career, so you want to be sure you’ve given yourself a solid cushion. Here are seven beginner tips to get you started.
1. Start Slow
Since there are so many retirement investing options available to you, don’t overwhelm yourself by researching them all at once. Start by finding out if your employer offers a 401k plan. From there, you can investigate both Roth and traditional IRAs.
In 2015, you can contribute up to $18,000 to a 401k plan and $5,500 to a Roth or traditional IRA. You can contribute an additional $6,000 to your 401k or an additional $1,000 to an IRA if you’re aged 50 or older. If you don’t have more than that to invest initially, that’s okay – you’ve started in the right places, and you can investigate other vehicles at a later date.
Learn more about 401ks from Wall Street Survivor
Learn more about IRAs from Wall Street Survivor
2. Look for Low Expense Ratios
Many people invest in mutual funds for their retirement – but did you know that fees are associated with them? An expense ratio is the percentage of a mutual fund’s assets that are used for operating expenses – essentially, it’s how much it costs you to invest in one. To get the most bang for your investment buck, look for low expense ratios – particularly those under 0.5% – commonly found in funds without active management such as ETFs (exchange-traded funds) or index funds. The difference between an expense ratio of 2% versus one of 0.35% may sound minimal, but over time that difference can reduce your portfolio by tens of thousands of dollars or more.
3. Track Long-Term Performance
To get a sense of how funds have performed against their benchmark index fund (such as the S&P 500) and their competition, look at their track records over the past five and ten years. You can find this information in the fund prospectus. While this can’t tell you how a fund may perform in the future, it can give you an idea of which funds had a winning strategy in the past. For example, if a mutual fund focused on blue-chip stocks seriously underperformed the S&P 500, you might want to think about investing elsewhere – or investing in the benchmark fund itself.
4. Establish Your Risk Tolerance
Generally speaking, if you’re young, you can afford to be more risky with your investments – your portfolio has time to recover before you reach retirement age. If you’re older, a more conservative approach may be in order. Determining your overall risk tolerance has a lot to do with understanding what investments let you sleep well at night. You might like the sound of high returns, but if experiencing occasional losses makes you nervous, you’re probably better off in a different fund.
5. Allocate Your Assets
Once you determine your risk tolerance, allocate your assets accordingly. One common formula is to subtract your age from 120 and use that number as a percentage to invest in stocks, and place the rest in bonds. Again, however, it’s all about feeling comfortable with your portfolio at the end of the day. Use this rule of thumb only as a template.
6. Only Use Money You Don’t Need Soon
To the best of your ability, make sure that the money you’re contributing is not money you’re going to need in the short-term. Withdrawing funds early from a 401k plan generally means paying penalties and taxes, as does taking an unqualified withdrawal from a traditional IRA. If you think you might need to pull money early from your retirement account, be sure to invest in a Roth IRA. You can withdraw your contributions – excluding gains – at any time without taxes or penalties.
7. Get Professional Help
Whenever you encounter something you’re uncertain about or can’t quite figure out, consider enlisting the help of a financial professional with retirement planning experience. Even though they often charge a fee, this can be money very well spent. For help locating one, check the website of the National Association of Personal Financial Advisors.
Once you start saving for retirement, be sure to evaluate your portfolio roughly once or twice per year. Checking in too often may tempt you to make bad moves based on short-term fluctuations in the market, but ignoring it can cost you big time as you age. Plan on reviewing it at the beginning of each year, and check in once over the summer, too – look for under-performing investments as well if your assets are allocated appropriately according to your age. Investing for retirement is important, just be sure you’re keeping a prudent and watchful eye over your portfolio.
How are you doing with retirement investing?