See also Diversification is the key to successful investing.
Planning for the future occasionally feels inconvenient when starting a life or trying to build one financially. However, no matter current financial situations, it’s crucial to begin saving for retirement and exploring investment opportunities as soon as possible.
“You spend a little bit of time crunching the numbers, and you can see how a little bit can go a long way with time,” USAA certified financial planner J.J. Montanaro said. “When you’re getting to the point where I am in life, you realize how it can pay off. You want to look back with a smile and not look back with regret.”
NerdWallet put some retirement figures into perspective. For example, by putting away just $14 a day at age 23, $1 million will be saved by age 67. To reach a million by age 67 and waiting just seven years to start putting money away, the amount invested needs to increase by 50 percent. Hold off until age 35, and the amount will double what it would have been at age 23. The lesson: Invest early.
Craig Israelsen, Executive in Residence in the financial planning program at Utah Valley University, recognized how overwhelming investing can appear but provided simple suggestions to get started.
Israelsen said a good place to start is with a mutual fund instead of single-company stocks. He described mutual funds as “a collection of investments” that help diversify investments.
“Think of it as those small boxes of cereal that get shrink-wrapped together. Instead of buying the big Costco box of cereal, you buy a variety of little boxes,” Israelsen said. “This is the same concept as mutual funds.”
He said there are many different mutual fund companies, financial planners and websites to purchase mutual funds through and suggested a few options, including Motif Investing, Homestead Funds, Betterment and Wealthfront.
“Homestead Funds is a great place to start because they only require a dollar initial investment and waive the normal initial investment of $500,” Israelsen said. “As a student or younger, you could build a diversified portfolio with Homestead for less than $12 a month and build from there.”
He said the spirit of the $12 portfolio is that it can start out as a small amount and be raised over time as finances allow. Starting out with small amounts like this helps investors become accustomed to and comfortable with investing — it becomes less foreign and more like a way of life.
Rhett Jeppson, financial advisor, president and co-founder of Investment Management Consultants in Salt Lake City, said he approaches investing with the mindset of safety first.
“The best place to start is to cover these three things: emergency reserves, reasonable shelter — make sure where you live is within your budget — and insurance for things you couldn’t economically recover from,” Jeppson said.
Having an emergency savings account, with six months of living expenses, is an important financial goal, according to Jeppson.
After accomplishing those three things, Jeppson suggested two rules for investing: diversification and time.
Don’t put “all your eggs in one basket.” Don’t invest in only one company; put money into a variety of companies for a safer, more consistent approach.
With the right time horizon and perspective, the volatility of the market doesn’t matter all that much.
Jeppson said the longer an individual’s investing time horizon, the riskier the investment should be. Higher risk and higher returns go hand-in-hand with enough time, and it’s important to think about long-term goals.
“If you bought a stock for $150 and it went down to $120 a few months later, you didn’t lose any money unless you sold it. With a long-term mindset, the small losses along the way don’t matter,” Jeppson said. “What matters is what happens 30 years from now.”
He said looking at the stock market over long periods of time shows how the market has a natural tendency to increase over time. That makes it a great place for long-term growth for retirement. However, in saving for a down payment on a home, it’s better to invest in something safer and more conservative.
“When you’re young and have a long-term horizon for retirement, putting your retirement account into stocks is very realistic,” Jeppson said. “But, when you’re in your 40s, 50s or 60s and are approaching retirement, your investments should become incrementally more conservative.”
He suggests tracking financial progress over time — whether in a spreadsheet or with an online resource like Mint — to make sure net worth is increasing year after year.
“There is such an enormous mathematical power in starting to save for retirement today. The value of time and compound interest is unbelievable,” Jeppson said. “I would encourage people, as a rule of thumb, to save 10 percent of their income toward retirement.”
He said planning for retirement is a reverse calculation. The question is how much people plan on spending in retirement and the lifestyle they want to live. A reasonably safe withdrawal rate is about 4 percent yearly.
Although an individual’s 20s can be filled with debt, paying rent, finding a job and providing necessities, those years should also be used to invest. Starting early means saving less.
There is a company-sponsored retirement plan — a 401k — where a percentage of the paycheck goes into the retirement fund and an employer will (typically) provide a matching program.
“If you can find a job where the employer is willing to pitch in and help with benefits, that’s a significant advantage,” Jeppson said. “For example, a company might put in dollar for dollar match up to 3 percent of your pay each year.”
He said participating in a 401k usually has additional tax advantages. For example, if someone has a $50,000 salary and he or she chooses to put $5,000 into the 401k every year, the IRS requires only $45,000 of the income be reported. Once a person is in retirement and withdraws money from the account, taxes are paid on the withdrawn funds.
“The most common retirement options you’ll encounter are a 401ks and an IRAs,” Jeppson said. “Just as there are many types of 401k plans, there is Roth IRA and a traditional IRA.”
According to Vanguard, withdrawals of Roth IRA contributions are not taxed because taxes are paid when the money is initially contributed. With a traditional IRA, ordinary income tax will be taken out on all withdrawals.
“If you’re young, a Roth IRA or Roth 401k is better while you’re in a lower tax bracket. If you’re older or in the peak of your career, a traditional IRA is likely better because you’ll pay taxes later when you’re in a lower tax bracket again during retirement,” Jeppson said.
According to Israelsen, if motivation is found to invest, plan and save for the future, it has a spillover benefit in helping an individual become more prudent in money management. He said investing and saving for retirement requires budgeting money more carefully because it’s another reason to be careful with spending.
“If a person figures out how to invest and create an account wherever they choose to invest, they’ve done something huge,” Israelsen said. “They built the machinery to become an investor, which represents the starting point of a lifelong process you can benefit from later.”