If we ever hope to stop working and enjoy our golden years, we have to save and invest for our retirement. Here are ten things to know so we can grow our retirement funds (and not run out of money before we die).
10. How Much You Should Save for Retirement
There are plenty of retirement "rules of thumb" designed to help people figure out how much they should be investing for the future. Not all of them are current, but research from over a century's worth of data suggests the "safe savings rate" for different scenarios. If you have 30 years 'til retirement, for example, and want to replace 70% of your salary, using a mix of 60% stocks and 40% bonds, you should be saving 23% of your salary every month. Head to this chart for additional scenarios. If you're just catching up, this is Fidelity's advice on how much you should have saved by now, by age group.
Don't let these daunting figures scare you off! Keep reading.
9. Even Just Thinking About Retirement Can Help You Save More
Many times, emotions and our thinking are the real roadblocks to getting where we want to be financially, but we can trick ourselves into saving more. For example, if you picture yourself in retirement, you're more likely to put away more, just like even playing with an online retirement calculator can help you save enough money.
8. There Are Tons of Tools to Easily Plan and Manage Your Retirement
For getting started and keeping track of your long-term investments, we like Sharebuilder, Personal Capital, Mint, and Betterment. For planning your retirement, these 10 calculators and tools are worth bookmarking. Even using investing gaming sites, can help you learn how to invest. Don't get lost in all the tools, though—get the basics down (see below) first.
7. Choose the Right Retirement Account Type
Some employer 401(k)s might not be optimal for your investments or your employer might not even offer one, so your choices in these scenarios will really depend on your options.
There are also all kinds of retirement vehicles—Roth IRAs, traditional IRAs, 401(k)s, and more. Check out our beginner's guide to the differences between IRA types, starting a 401(k) account, and which kinds of investments to use for taxable or tax-deferred accounts if you don't want your money to get eaten away by taxes.
6. Compounding Is So Powerful It's Almost Magical
The power of compounding turns a dollar saved in your 20s into ten dollars saved in your 50s—without any additional investment at all. When you're young, time is your best financial asset. Not convinced yet? The Rule of 72 explains how your money can double in a short amount of time, and how even the smallest investments now—1% more towards your retirement, for example—can make a huge difference. Compound interest matters more than you might think.
5. Don't Miss Out on an Employer Match
Grab it. Take it. Your employer match on your retirement contribution is one of the best benefits you could have as an employee—it's literally free money and basically like a guaranteed 100% (or 50% or whatever the match is) return on your investment.
4. Look Out for Fees First
When picking out investments for your retirement account, the most important number to look at might be the expense ratio—the percent the fund charges just for managing your money. This fund analyzer tool can help you compare 401(k) fees, and this one reveals hidden fees that can cost you lots in the long run. After taxes, fees, and inflation, you might not make as much as you might think—but you'll make more if you cut the fees to as low as possible. (Actively managed funds tend to perform significantly poorer than those that just track the stock market.)
3. Automate Your Savings—and Stick with a Plan
Even if the stock market gets bumpy, don't panic. Think of it like a rollercoaster (which it is) and don't get off until the end. (Do, however, reassess your portfolio at least every year so you're balancing the amount of risk you're taking based on your retirement date.) The most painless way to do this is to have a portion of each paycheck automatically sent to your retirement fund. This dollar cost averaging strategy could help you balance out the times when stocks are more expensive and when they're at their cheapest. (Don't try to time the market.)
2. Getting Started Is Easier Than You Might Think
Investing can definitely be intimidating, but if you keep it simple, you can set up a (mostly) set and forget investment portfolio. Investing in individual stocks might be attractive for advanced investors, but in general most people will benefit from the simple lazy, hands-off strategy. You can even start really small—as small as investing just $50 a month.
1. The Best Time to Start Investing Is Now
Perhaps the most important thing to know is the sooner you start saving for the future, the better. Like, hundreds of thousands of dollars better. Waiting to start saving is one of the biggest money mistakes we can make, according to Warren Buffett, and even bad investments are better than not saving at all. In the famous words of Nike: Just do it.
Photos by Tina Mailhot-Roberge, Natalya Kalyatina (Shutterstock), James Robinson, torkahopper HE DEAD, MoneyNing, Andreas Poike, Digerati Life, Galushko Sergey (Shutterstock).
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