Invest for Retirement

Financial Freedom in 2021! Take Action: Day 20

It’s hard to picture yourself getting old. It can be difficult to imagine a day when you won’t be capable of or motivated to work in some capacity. However, it’s not that hard to picture yourself spending every day exactly as you choose without the pressure of earning money to cover bills. Hold that thought!

Let’s talk about retirement planning. I am not a financial planner, nor an advisor, but I think about investing for retirement quite a bit. There is A LOT of information out there on how best to invest your money long-term. There’s no way I can cover the mountain of advice I’ve read and listened to in a short blog post. Instead, I’ll share the best tips I’ve heard from my favorite finance peeps.

Start as early as possible!

Let’s illustrate this with two extreme cases… Early Ellie and Late Larry. Both start working at 20 and both want to “retire” at 60. The market returns 7% a year, compounded monthly.

  • Early Ellie diligently invests $100 a month for ten years. She stops contributing when she turns 30 but leaves the money in the market for the next thirty years until she’s 60.
  • Late Larry waits ten years before he starts investing $100 a month into the stock market for the next thirty years until he is also 60.

Who ends up with more money… Ellie who has personally contributed $12,000 or Larry who has personally contributed $36,000?

  • Ellie – $141,303.76
  • Larry – $122,708.75
Source: Wallet Hacks

The early bird almost always catches the worm… first. But don’t take this to mean that if you’re starting late that you shouldn’t start at all. Today is still earlier than tomorrow!

Also, remember that more time in the market is better than timing the market. My husband and I were nervous about purchasing more shares of VTSAX during the week of the inauguration, not knowing what kind of response the stock market would have to the change in administrations. Well, I wish we had purchased last weekend as planned because the stock market had the biggest rise on Inauguration Day in 36 years! 🤦‍♀️

Identify the Right Investment Accounts

This article from Nerd Wallet summarizes the 4 types of accounts you need to know (brokerage accounts, retirement accounts, education accounts, and kids’ accounts).

Diversify your portfolio.

Many planners suggest using the bucket approach: hold some cash savings along with investments in stocks and bonds to balance out your funds. Many also add other investments, such as real estate, commercial ventures, and personal lending to diversify further.

Simplify Investing with Index Funds

If you’ve read JL Collins’ book, The Simple Path to Wealth, you know that his main piece of advice is to choose index funds and then leave them alone. Here’s an example of a simple portfolio that would be easy to execute and have you well diversified in stocks and bonds within your accounts mentioned above.

  • Total Stock Market Index
  • Total International Stock Index
  • Total Bond Market Index

The stock index funds allow you to invest in every stock within that index in proportion to the size of the company. You own a piece of all the companies. No need to pick just one or a few companies. If the whole stock market index goes up, so does your portfolio! It’s also recommended to balance out your domestic holdings with some international ones, just in case the US economy takes a nose dive. Many recommend that 15-30% of your stock holdings be in international markets.

Bonds typically carry less risk (and lower returns), but they balance out the more risky stock investing. Owning a bond index saves you from trying to decide which bonds are the best. Own them all instead.

(The portfolio above is only ONE example of thousands of options for a retirement investment portfolio. )

Beware of High Fees

Another reason why index funds have become so popular is because they come with very low fees, usually under .5%, which is significantly less than actively-managed mutual funds. This way, you can keep as much of your interest earned as possible.

Rebalance your Portfolio over Time

Rebalancing refers to adjusting your asset allocation based on your current risk tolerance and how close you are to retirement. For a young person who has many years before retiring, her portfolio will likely be heavy in stocks. For someone who is within a few years of retirement age, her portfolio will likely be heavier in bonds to minimize risk and preserve wealth.

Choose a Fee-Only Financial Advisor or Planner

Advisors working on commission are quickly becoming a thing of the past. According to Investopedia.com, “fee-only advisors have a fiduciary duty to their clients over any duty to a broker, dealer, or other institution. In other words, upon pain of legal liability, they must always put the client’s best interests first. In contrast, a commission-based advisor’s income is earned entirely on the products they sell or the accounts that are opened. Commission-based advisors can be fiduciaries, but they don’t have to be.”

When looking for advice on retirement planning and setting up the best investment portfolio for your specific situation, a fee-only advisor is likely your best choice.

No matter what you decide are your best options, just make sure you’re prioritizing a significant part of your savings to go toward investing in retirement. If the infinitude of information prevents you from getting started or scares you from making a necessary change to your portfolio, keep your strategy as simple as possible.

Today’s action step is to review all of your investment accounts.

  • Identify what percentage is going into your 401K and make sure it’s at least at the match your company offers (if they do) but preferably closer to the max allowed.
  • Pay attention to whether you’re maxing out your IRA’s, if you have any, and if not, can you? Decide if you’re eligible for a ROTH IRA. If so, might that be a better choice than a traditional one?
  • Review your asset allocations in each account and determine whether those represent your risk tolerance and age.
  • Assess the fees you’re currently paying to a financial advisor and/or through an actively managed mutual fund. If they’re high (>1%), consider passive investing through index funds.
  • Discuss what percentage of your income you want to invest moving forward, in stocks, bonds, and other potential opportunities.

There is a lot to consider, and it may be worth scheduling another money date to go over the many questions and options regarding retirement planning. I admit that this is likely not a one-day action step. Mark your calendar to dive in deeper and cover all the bullet points listed above.

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