It's never too early to think about or begin investing for your retirement. I started when I got the first job that offered any kind of retirement benefit. I was about 33 and thought it silly to even worry about it. My mother explained she'd started saving for her and my father's retirement when my father hit the age of 40.
Most investment advisers these days want you to plan for retirement without even thinking about Social Security, for a few reasons, but mostly to avoid outliving your savings or the benefit you earned by paying tax on your income for retirement savings.
Social Security, even if it is around when you retire, only provides on average about $17,521 a year. That's barely enough to live above the poverty line for an individual, but at least it is more than being destitute or having to work 40 hours a week at a minimum wage job to make it.
So, how do you invest for retirement?
How to Invest for Retirement: 12 Tips
1. Find and Consult a Trusted Financial Adviser
This could be a human or a robo-adviser. Robo-advisers are online services using computer algorithms to construct and manage your investment portfolio. You set your targets, such as time horizon to retirement and how much investment risk you think you can tolerate, and the computer does the rest. They help you choose your investments and manage your portfolio.
Personal financial advisers help manage various aspects of your financial life and can be hired on an ongoing or temporary basis. If your financial situation is complicated, you may want a financial adviser you can talk to.
A third alternative now exists, a hybrid robo-adviser, with which you automate investing with access to human interaction as necessary. This hybrid alternative costs more than a basic robo-adviser, but less than a full-service human adviser.
2. If You Haven't Yet, Start Now:
There is no getting around the fact that, unless you're independently wealthy, you cannot build funds for your retirement without taking some of your current earnings and saving them.
If you have a job that offers a retirement plan, such as a 401(k) now, and you are 22 years old earning $40,000, you could conceivably have retirement savings of $1.7 million at age 65, if you put 10% of your salary into the retirement plan, and get a 3% employer-matching contribution - not accounting for raises or increased contributions. If you're already a decade older and only starting, the same contributions will amount to about $780,000.
3. If Your Employer Offers It, Take Advantage of the 401(k):
A 401(k) allows you to save pre-tax money through payroll deductions. When you take money out of your 401(k), it will be taxed.
4. If Your Employer Doesn't Offer a 401(k) Plan, Set Up an IRA:
If your job doesn't have a 401(k) plan, you can set up an Individual Retirement Account. There are several different kinds of IRAs: Traditional, Roth, SIMPLE, and SEP.
A traditional IRA works like a 401(k) provided by an employer - you can deduct money you invest in your traditional IRA from your federal income tax, but you'll pay taxes later when you take it out.
A Roth IRA doesn't have the pre-tax contribution advantage, but, because the tax is already paid on the contributions, you won't be taxed when you take money out of it.
A SIMPLE IRA is another retirement savings plan offered by employers in small businesses with 100 or fewer employees. SIMPLE is the acronym for Savings Incentive Match Plan for Employees.
Employers offering a SIMPLE IRA must either match contributions employees make to their plan, up to 3% of salary, or the employer can make contributions for employees of 2% of salary - whether the employee participates or not.
Unlike a 401(k) plan, in which an employer can choose to match employee contributions or not, SIMPLE IRA employers are required to either match or make contributions.
Contributions to a SIMPLE IRA, like a 401(k), are pre-tax, meaning money in the plan accumulates tax-deferred until being withdrawn at retirement. A 10% penalty is imposed on withdrawals before you reach 59 ½. Employees younger than 50 can contribute generally up to $13,000 into their SIMPLE IRA, while if they are over 50, they can contribute an additional "catch up" contribution of $3,000.
A SEP IRA is another IRA with an acronym. This one stands for Simplified Employee Pension. The SEP-IRA allows self-employed individuals and employers to save for retirement. Like with a traditional IRA, contributions to a SEP IRA are tax-deductible, are tax-deferred until drawn out in retirement - when distributions will be taxed as income.
But an employer must contribute to a SEP IRA on behalf of eligible participants, and the contributions must be an equal percentage of compensation to the employees. Eligible participants must be 21 years old or older, have worked for three of the past five years for you, and earned at least $600 from the employer in the past year.
5. You Can Contribute to Both:
Even if you contribute at work to a 401(k), you can still open up an IRA. The 2019 maximum contribution for an individual to an IRA is $6,000. The 401(k) contribution limit for an individual is $19,000 in 2019. So if you were able to maximize your contribution to both, you could have $25,000 saved in a year for retirement. And if you are 50 or older, your catch up contribution to your 401(k) is an additional $6,000 for 2019. So it is possible, if you had or could spare the money, you could have $31,000 saved in 2019 contributions, not counting employer matches.
6. Take Advantage of a Match
The standard rate of matching by a company for a 401(k) is 50% up to an employee maximum percentage contribution of 6%. This means if you contribute 6% of your salary to your 401(k), your employer will contribute 3%. It's as if someone promised to put in $5 for every $10 you put in.
7. When You Leave Your Job
When you leave your job, as long as you have put in the required amount of time to be "fully vested" in your 401(k), you can either leave it with your last employer or take it with you. The reason both IRAs and 401(k) plans were created was to encourage people to save for retirement. If you withdraw money from either, generally speaking, before you reach 59½, in addition to paying federal and state taxes on it, you'll have to pay a 10% penalty.
8. You Can Leave It, or Take It
Your 401(k) is tied to your company. That means it stays where it was until you decide what to do with it after you leave the company. You can either roll it over into a new employer's 401(k), or create an IRA at any financial institution you want, and roll your 401(k) into your new IRA.
9. Ignore the Stock Market
Especially when you're first starting out investing, don't put your retirement savings in just one or two stocks. Invest, many advisers will tell you, in low-cost, stock-oriented mutual funds. Some funds, like exchange-traded index funds, track various indexes for strategy. Target-date funds allow you to target a year in the future when you plan to retire, and compose the fund accordingly. Either option seldom, if ever, will "beat the market" in terms of returns. But better to keep up with the market than fall behind.
10. Be Aggressive
The farther down the road in age you plan to start withdrawing your retirement money, the more aggressive you can be in terms of investing. If you're not in a mutual fund, consider investing in some funds with individual domestic and international stocks to take advantage of long-term growth.
11. Lighten Your Load
You will have many more investment choices with an IRA than with your employer's 401(k). Different mutual funds charge different amounts. So look, first, for 'no-load' funds, so you can reinvest most of your returns. Mutual funds that charge a sales charge or commission for shares purchased carry a 'load.' The load can be a flat fee or a percentage of the amount you are investing. Say, for instance, you wanted to invest $1,000 in a fund that carried a 5% load. That charge, $50, would be your payment to the broker or financial planner, for their service in finding an appropriate investment for your $950.
A no-load fund charges no fee when you buy or sell your shares. One downside, however, to a no-load fund it that, frequently, you can't sell your shares without having held them for some proscribed time. This isn't a hardship on a long-term investor, but if you want to be able to move your investments around more frequently, you may be better off carrying a load.
12. If You're Going to Track an Index
Try an Exchange-Traded Fund or ETF. Generally speaking, an ETF can be bought or sold like an individual stock. ETFs track entire markets, not just a single index. Your fund can have investments tracking the Dow Jones Industrial Average, S&P 500, NASDAQ, or any other market with just the one fund.
The bottom line is, before saving for retirement, do some research. There are always people happy to hold your money. If you want your money to do more than just earn a few dollars in interest in a bank account, or sit in a coffee can in your back yard, there is a way to let your money continue to make money.