Overview: Investing for retirement is very important, but for many people, it’s out of sight and out of mind. Investing isn’t as hard as the finance industry has made it sound. If you do it right. Write down your goals so you have a plan. Get your finances in order so as to make investing a key component of your budget. Finally, do what so few bring themselves to do: start.
For some, saving for retirement is a fun challenge that is focused and methodical. For many others, it may seem like a distant country, rarely thought about or visited. Either way, today just brought you one day closer to the day you’ll need to rely on the money you’ve saved and invested for retirement. So, investing intelligently and consistently are crucial for success.
Investing, specifically for retirement, doesn’t have to be hard, complex, or mysterious, even if the daily talking heads try to sell it to you as such. I’m not a financial guru, but would like to simply share with you some of the things I’ve learned along the way, the things I wished I knew 20 years ago.
Write down your goals
The first step in getting started is to make an investment policy statement, or simply, a written path for your goals. It’s hard to know where you are going or where you want to end up without having a destination in mind. Things like the age you’d like to retire, how much income you would like to have, what type of investments you want to have, how you want those investments allocated, and probably most importantly: how long to wait before making any changes to your plan.
Having a plan and sticking to it are important. You won’t retire rich if you constantly change plans and ideas as the wind blows. New fads and investment strategies come and go, but sticking to your plan is a safe way to proceed. People not sticking to their plan is why they buy high and sell low, it’s why they add years to their retirement date, and it’s why people get frustrated and make poor decisions. After careful study and planning, if you still decide to make a change to your plan, sit on your hands for three months to make sure you really want to follow through.
More reading on investing plans:
Writing an investment policy.
Get your house in order
Prior to saving for retirement, make sure your financial house is in order. You don’t want to be putting money into a Roth IRA earning 8% if you have outstanding credit card debt at 29%. Paying off consumer debt is a guaranteed 29% return on your money, which is one of the best investments out there. Also, make sure you have a decent emergency fund. That will help you sleep at night and prevent you going into more credit card debt if trouble arises. Ideally, you should have zero debt. The next best option is to only owe money on a mortgage. If you want more of the basics on getting started, I highly recommend Dave Ramsey’s 7 Baby Steps to get you on solid footing. Dave’s investment advice leaves a lot to be desired, but his debt reduction methods are sound, proven, and work. They worked for me. Another good “steps” plan oriented at the beginner is here.
Start investing
“The enemy of a good plan is the dream of a perfect plan.” With a goal in mind and written out, do what so many people find hard to do: start investing. If you aren’t used to setting money aside monthly, it’s okay to start small and work your way up, just do what you can. Great tools like Mint, YNAB, and Personal Capital are easy ways to setup and stick to a budget while seeing where your dollars are going. It may feel painful when you send money to a 401(k) or Vanguard, at least at first. Remember that you aren’t losing it, but simply setting it aside for later. As time goes by, you’ll get used to living on the money you have left and it gets easier with time. Pay yourself first, i.e. your retirement and savings, then live off the remaining funds.
What most people cannot afford to do, is not start. A little bit of money invested early trumps lots of money invested later. The powerful force of compounding only works with time. Investing $2K a year from age 18 to 28 at 10% return beats investing $2K a year from age 28 to 65! Let that sink in, and then let that motivate you to start saving for retirement today.