I am unqualified to offer you financial advice about retirement. I’m not a professional (or even an amateur) money whiz.
That’s why I have a feeling my advice might be useful here. In particular, I’m offering advice to absolute beginners who’re trying to wrangle their personal finances for maybe the first time. I’m a regular Jane with a mild interest in personal finance and a love of making my life as easy as possible.
Sometimes, the people who offer the most advice about finances are also the wonkiest about it. They love to spend their weekends poring over financial threads on Reddit. As a result, their advice might be accurate but fatally flawed by complexity. The good news is that even the bare minimum of financial planning can make a difference of hundreds of thousands of dollars down the road.
Here are the things you need to set up. It’ll take a few hours, but it’ll be worth it. So do it.
Start paying attention.
Retirement in the United States used to require a lot less legwork from employees. Many jobs came with a pension or what they call a “defined benefit” retirement plan. Through these plans, the worker was all but guaranteed a set amount of money each month in retirement without having to make a bunch of decisions.
These days, it’s usually more complicated. Employees are asked to make two important decisions about their retirement:
- How much money do you want to invest out of your paycheck? and
- Which investments of those offered by the provider do you want to invest in?
We’ll come back to these two choices in this post. If you don’t choose to engage in these decisions — or even if you delay making them for a few years, the system is not built to support your inaction. No one’s coming to save us in retirement.
The government program called Social Security could provide you with some income support in retirement. It’s unwise to count on an unchanged future of the program, and the payments are unlikely to provide for all the income you’ll want in retirement.
Okay, so you need to care about this. But why do you need to care now? The answer is compound interest. Even if you make a modest investment early in your career, the growth of those investments will increase exponentially over time. It will be really hard to catch up in the future to the returns you can achieve with even modest contributions now.
You can choose to trust me or you can see for yourself using this calculator and a conservative assumed interest rate of 6%.
Figure out what’s up with your employer’s retirement plan.
Now that we’re super motivated, let’s take action.
Every company works with at least one financial company they designate to handle the management of the employee accounts and investments. Examples of these might be ADP, Charles Schwab, Fidelity, or the like. As an employee investing in a retirement plan, you probably can’t choose which retirement broker you’ll work with, but you can exert control over those two questions:
- How much money do you want to invest out of your paycheck?
- Which investments of those offered by the provider do you want to invest in?
Ask to speak to the person who manages your company’s retirement options. Depending on the type of company you work for, they might call your retirement fund by different names: (403(b), 401(k), 457, TSB). You’ll also hear the word “Roth” tacked in front of some of them. Don’t worry about this. The thing they have in common is that, with all of these, you get a tax benefit if you don’t withdraw the investments until retirement.
The person you speak with should be able to facilitate a conversation about helping you understand the above two decisions. We’ll get to each more in depth below. You can ask for some time to consider your options before you commit to a choice. At a minimum, ask this person these questions and write down the answers:
- What contribution does my employer make to my retirement, and is a match required?
- If a match is required, how much would I need to contribute each month to receive the entire match?
- Do you offer target retirement date investment options?
- If so, what’s the expense ratio on these plans (more on this concept below)?
If you talk to one of those wonky personal finance geeks, they love to tell you that you should take advantage of a retirement account outside of your employer-sponsored one that you can set up yourself.
This is a good example of the type of advice that makes navigating these waters overly confusing. It might scare some people away from even trying to invest. If researching and setting up those accounts gets you excited, then by all means go for it, but this post isn’t for them. It’s for us. And we want things to be simple.
Decide how much you want to contribute.
Here’s another place the personal finance wonks get excited. They like to debate in what order you should think about prioritizing your money. That affects how much money they recommend you invest into your retirement. Generally, they see five buckets where your money can go:
- Paying off debt
- Saving for an emergency fund
- Retirement savings
- Living expenses
- Saving for major expenses, like a down payment
I don’t find the particulars of this debate to be especially helpful. These are all competing priorities that will never be in perfect harmony. As time goes on, the priority of each of these buckets to you may rise or fall.
Bottom line, when it comes to your retirement savings, do try to save something on a monthly basis — the more the better. Employers will funnel this money right out of your paycheck, so you don’t even have to tearfully watch it leave your checking account.
Why, though? Back to the idea of compound interest: as a young person, you might not be money-rich, but you are time-rich. The sooner you start contributing, the greater your investment returns in retirement.
Beyond my encouragement that you save something, at a minimum, if your employer offers a retirement contribution match, try to contribute the amount you need to receive the full match. If this is simply impossible for you to achieve financially now, make it a short-term goal to get there.
That said, don’t contribute ’til it hurts. When it comes to retirement accounts, you usually can’t take your investments out before retirement age without penalties. For this reason, you don’t want to contribute to the point where you might need to dip into your retirement to bail you out. Once you invest your money in retirement, it needs to stay put.
There is a cap on the amount you can invest into a retirement account and this changes by year and account type. If you have this problem, you’re lucky, and there are many resources out there that offer advice on what you should do once you hit the cap.
Figure out where to invest your money.
Remember how retirement investing is all about the power of compound interest? Well, I’m sorry to report that simply contributing money is only half the story. You have to invest your money to see it grow.
There are a few concepts that are helpful to understand before we dive in here.
Stocks and Bonds
When we talk about investing, we’re talking about stocks and bonds. A bond is like an IOU that a company or government writes to you, promising to give you a set amount of money for the loan. A stock is literal ownership of a teeny piece of a publicly traded company. When they are profitable or the stock grows in value, you are entitled to share in those successes as an owner. Both of these investments can earn you money. You can also lose money on either type of investment.
Retirement funds generally offer investment options called mutual funds. Unlike investing in single companies or bonds, these funds spread your retirement investment out over a broad range of investments, selected by a finance professional — usually some combination of stocks and bonds.
These are great because they reduce risk in your retirement investment by spreading out — or diversifying — your nest egg. Plus, someone else goes through the trouble of selecting investments. The combination of all your retirement investments across any number of mutual funds is called your retirement portfolio.
In exchange for the convenience of maintaining a mutual fund’s investments, the financial company charges you a percentage of your investment. This fee is called an expense ratio. High expense ratios work against the magic of compound interest, which we talked about before. Keeping your investments’ expense ratios as low as possible is, therefore, a good move.
Risk and Reward
Finally, you’ll hear people talk about risk and reward as key concepts in retirement investing. Generally speaking, stock-heavy mutual funds offer investors more risk as well as more potential rewards. The opposite is true for more bond-heavy investments. This is a generalization; there are large differences in risk/reward trade-offs within different kinds of stocks and bonds.
So where do you put your investments?
My advice is to see if your company offers a target date retirement fund option. This is a great option because it complements our strategy of simplicity. What’s cool about these funds is that they select a portfolio of mutual fund investments on your behalf that recalibrates over time as you near retirement. The closer you get to retirement age, the less risky your portfolio becomes—ideally lessening the potential pain of retiring into a stock market dip. You can invest all of your retirement investments into one of these funds and feel the pride of having made a reasonable retirement plan that took minimal effort or expertise.
To pick the right account, you need to estimate your retirement age, usually around 65 years old, and then figure out the year of your personal retirement date based on that estimate. The plans are usually named for this year.
The only thing I’d advise you to consider before committing to one of these great investment options is the size of the expense ratio. If the expense ratio is about 1% or higher, that’s probably too expensive for you, and you can ask your financial company representative for similar portfolio options with lower expenses.
Some people choose to make their retirement decisions on the basis of investing in companies whose work they ethically support. I think this is a good consideration for investors. But, for the theme of simplicity, I won’t ask you to consider this aspect of investing when you’re getting started. Remember, you can always refine your approach once you’ve gotten over the hump of making regular retirement investments.
Good job! Now what?
Okay, so you’ve completed the paperwork to open an account, and you’ve opted to make regular contributions from your paycheck — ideally enough to receive your employer’s full contribution match. Additionally, you’ve selected a diversified investment portfolio that makes sense for your age and has a low expense ratio. Yay! That’s huge. Now what?
You have two options.
If you found this process interesting, you can evolve into a personal finance nerd yourself! There are so many options to educate yourself for free using online resources (my wonkiest colleague suggests this one). As long as you steer away from anything that promises you can retire at 25 or encourages you to invest your entire retirement in Dogecoin, you can really improve your life through learning from these resources.
Your second option is to do literally nothing. Don’t check in on your account when the market changes; don’t shift around your strategy. Just stay the course, make your contributions, raise them when you get a raise, and leave it alone. This is one of the hardest parts of a smart retirement plan, but you’re lucky because it takes no effort on your part. It’s what you were doing before you invested anyway, but now your inaction can be smug inaction, instead of anxiety-riddled inaction.
I hope this is just enough information to spur you into your first confident retirement investment. Let me know what you learn when you do.