Investing may seem complicated, but today there are many ways to begin, even if you have minimal knowledge and only a small amount to invest. Starting as soon as possible will help you get closer to the retirement you deserve.
Investing often feels like a luxury reserved for the already wealthy. Many of us find it difficult to think about investing for the future when there are so many things we need that money for right now. But, at some point, we’re going to want to stop working and enjoy retirement. And simply put, retirement is expensive.
Most calculations advise that you aim for enough savings to give you 70% to 80% of your pre-retirement income for 20 years or more. Depending on your goals for retirement, that means you could need between $500,000 and $1 million in savings by the time you retire. That may not sound attainable, but with the power of compounding growth, it’s not as hard to achieve as you think. The key is starting as soon as possible and making smart choices. Below, we’ve outlined many of the important decisions you’ll make when you get started.
The short answer is “now,” no matter what your age. Due to the way the gains in investments can compound, the earlier you start the better. Money invested in your 20s could very easily grow over 20 times before you retire, without you having to do much.1 That is powerful. Even if you’re in your 50s or older, you can still make significant progress toward meeting your goals in retirement.
Most financial experts say you should invest 10% to 15% of your annual income for retirement. That’s the goal, but you don’t have to get there immediately. Whatever you can start investing today is going to help you down the road. So, if 10% to 15% is too much right now, start small and build toward that goal over time. You can actually start investing with $5 if you want. And you should. Some investment products require a minimum investment, but there are plenty that don't, and a lot of online brokerage accounts can be started for free.
The best investments for you are going to depend on your age, goals, and strategy. Later in this article, you’ll get an overview of the types of accounts and investment options that are available. It’s impossible to make specific recommendations, however, without getting to know you and your situation. Don’t let that slow you down, though. The important thing is to get started. You’ll learn as you go. If you have questions, a dedicated financial services professional can help give you the guidance and options you need.
The first thing you’ll need to decide is what type of account you want to place your investments in. There are many options available today, from a tax-advantaged 401(k) offered through your employer to simply downloading an investment app on your phone. After you have an account, you can begin to make contributions and select different investments. Here are the most common accounts:
If your employer offers a 401(k), that’s the first place you should consider investing for retirement. There are a lot of benefits. The contributions can be taken directly out of your paycheck pretax, and employers often match some of your contributions. A common employer match is 50% of the first 6% you contribute, so not taking advantage of a 401(k) is like turning away free money.
IRAs are also tax-advantaged retirement accounts. They aren’t attached to your employment, so they have a bit more flexibility, especially if you are self-employed. There are a few terms and choices you’ll need to understand, like contribution limits, to take full advantage. Learn more about how to set up an IRA.
Another easy and fairly cheap way to get into investing is to use a robo-advisor. Basically, the funds you contribute will be invested by an algorithm based upon your goals, which are usually determined by taking a survey. This helps keep fees low; the algorithm doesn’t rely on a human expert to make trades, and you don’t have to spend significant amounts of time researching your investments. While this is a good way to start, it may not be the best option in the long run.
More options are becoming available all the time, and they have opened trading to a much larger percentage of the population. That is a great thing, but it’s important to remember that “easier to invest” doesn't necessarily mean it’s easy to invest well. Be wary of apps that “gamify” trading and encourage risky choices. Keep in mind that trusted names offer more security, so do your research when you are selecting a platform. Investing should be taken seriously, and we encourage you to have a good working relationship with a financial services professional.
Once you have an account, you’ll need to decide what to invest in. There are lots of options, and each comes with different benefits and drawbacks. Here are some of the most common options for beginners.
Stocks are the first thing most people think about when they are considering investing, but they are not the only option. The prices of stocks change daily, sometimes by large amounts, as the market adjusts to news and various cycles. For that reason, it’s important to do your research. If you’re just beginning with a retirement account, you could also consider the longer-term products listed below.
Index funds attempt to replicate the performance of an unmanaged market index. The performance of mutual funds varies. You can often get involved for a lower initial investment, and they can provide good diversification,2 which makes your portfolio better equipped to handle market fluctuations. For that reason, many financial experts say they should form the core of your retirement portfolio. While they have many similar characteristics, there are important differences. Read more about some of the differences in index funds and mutual funds.
These technically aren’t investment products; they are a contract between you and an insurance company. However, they work to accomplish a similar goal. There are immediate annuities that convert some of your existing savings into lifetime payments, but if we’re talking about saving for retirement, a deferred income annuity is the closest comparison. You make premium payments into the deferred annuity on a regular or irregular basis depending on the contract terms, and when you reach retirement age, you annuitize those savings and receive payments for the rest of your life. They can make a valuable addition to a retirement savings strategy. Learn more about the types of annuities.
There are many other types of investments and financial vehicles: bonds, money market funds, certificates of deposit through a brokerage account or investment apps. More than we can cover in a single article. Even the cash value of life insurance can play a part. They are all designed to address different needs and have benefits and drawbacks and may be important to your overall strategy.
¹Compounding growth is based on 40 years with a hypothetical 8% annual return. Returns vary over time and is not indicative of the performance of any particular financial vehicle.
²Diversification does not assure a profit or protect against market loss.