- Investing 101
- The younger you start the better
- Company-sponsored 401(k)
- Let the experts manage your money
- How much should you invest every month?
- Don’t panic about a market downturn!
- Aggressive or conservative investments?
- Get started today
The stock market is all the rage right now. With all three major indices hitting record highs and dying companies like Gamestop seeing their value surge beyond $21 billion with the help of Redditors, the interest in stocks is extremely high. But day trading isn’t for everyone and most people only invest towards their retirement. So you may be asking yourself a simple question: “When should I start investing for my retirement?”
We’ll take a look at some investment basics and advice on when and how you should get started, no matter your age or how much money you make.
Investing 101
There are all sorts of investments one can make in life. Investments in your health, a vehicle, a home, and in college are simple enough to understand. But what about stock market investing? Is it only for day traders and wall street suit types or can regular people make money as well? What about investing for retirement? These are good questions but more important than if you can invest is why you are investing.
If you’re in it for the short-term to make a quick buck there is an opportunity to be had but not one we recommend. This is a very risky way of looking at investing in the stock market. Trying to pick individual stocks and understand the insane amount of information on a companies financials and the future outlook is for trained professionals.
But, that doesn’t mean you should avoid the stock market altogether. In fact, there is no greater wealth building and saving mechanism on the planet than the stock market. Investing for the long term, for your retirement, and your future is what we like to see people doing. Smart and sensible consistent investing towards retirement for your life is the way to go.
The Younger You Start the Better
When you reach retirement age you’ll want to be sure you have enough funds available to live the remainder of your years in relative comfort. We can’t rely on social security or other government programs so it’s up to you to make sure you’re ready for retirement. Starting young makes a huge difference. Your retirement accounts have more time to gain value and recover from any market downturns. With compounding interest and dividends, your retirement account will build on itself and continue to grow until you are ready to take it out.
But this requires getting started. If you start at the age of 18, you’ll have a long time for your investments to work their magic. If you start at age 50 and expect to retire at 65, you’ll have far less time for your investments to build value. Think about this without the stock market in mind for a moment.
If you start saving $200 a month at age 18, you’ll have saved $2,400 a year and $112,800 by the time you hit 65. That is on a strict cash basis it doesn’t factor if you put that money in a savings account at 1% interest (higher than most banks even offer) it will consistently grow over time. But if you put that money in a 401(k) or IRA that is invested in the market, that could easily grow 2-4% in a bear market or down market, and upwards of 8-15% in a bull market. This may not mean much to you now but the point is that investments can generate far more income than traditional savings accounts over a lifetime, even in a bad market.
Company Sponsored 401(k)
Most people who hold a full-time job on a salary will have the option to put some of that money into a company-sponsored 401(k). Not all companies offer them but many do and they may even match a percentage of the amount you put in. If your company has a 401(k) program, enroll and start putting in a small portion of your salary straight away. If you can’t do that but you can enroll in a 403(b), do that. If you can’t do any or are self-employed, you can start investing in an IRA which functions similarly to a 401(k).
Learn about the Basics About an IRA
Let the Experts Manage Your Investments
Yes, there are lots of “commission-free” trading apps out there, but when something is free you are likely the product. Certain retirement accounts can be self-directed, meaning you manage the investments on your own, or directed by a firm (Merrill, Schwab, Fidelity, etc). These companies have long tested investment teams and strong financial track records helping their clients prepare for retirement. In short, managing your investments isn’t for everyone or even most people. Wrong decisions or misplaced focus can hurt your portfolio and therefore your retirement. Making large bets on a single stock or trying to feed off a Reddit fueled meme stock isn’t the way to prepare for your golden years.
Let the experts manage your long term investments. Focus on the longer term and you’ll be better prepared later in life.
How Much Should You Invest Every Month?
This will depend on your income, living situation, liabilities, expenses, and more. As a rule, you should be trying to save a good portion of your monthly paycheck. Most financial planning studies have shown that you should contribute 15-20% of your monthly paycheck into your 401(k), 403(b), IRA, or similar retirement program. This may seem like a lot, and maybe you’re not in a position to save that much. So do what you can even if it’s 10% or even only 5%. It will make a huge difference when you are older. Saving something is always better than saving nothing especially when it is in the stock market where very little can go a long way. And just because you can’t save now, doesn’t mean that in five years you won’t be able to. Save anything you can.
Don’t Panic About a Market Downturn!
Markets go up and down in cycles. One of the most important things to do when you are investing for retirement is to understand that the market will go up and down and there isn’t anything you can do about it. It is even an advantage when it goes down if you are still young and not retiring anytime soon. This is because if you’re investing a fixed amount every month when the market goes down it means you’re buying shares at a lower price. This is called dollar-cost averaging. When the market is super high and you’re investing you’re getting fewer shares for the same amount of money.
When the market goes down you get more shares for that amount of money. So that means a market downturn is a retirement opportunity (as long as you’re not about to retire). This is because you’ll have more time to recover any losses and will be able to get in at a lower price. This is why you shouldn’t panic about a market downswing. It will help your long term retirement goals. If you look at a stock market chart from its inception, it goes up and down but over a long enough time it always goes up. If history repeats itself, this is a good thing for your retirement accounts.
Aggressive or Conservative Investments?
This will depend entirely on your age. As a rule, financial advisers recommend people who will not retire for many years to invest 80% of their funds into more aggressive options and 20% if safer less volatile investments. Any reductions that occur on a market downturn through your more aggressive investments will have plenty of time to recover and gain from there. If you’re 2 years from retirement and the market takes a big hit and you’re still invested 80% in the aggressive side, you could lose a huge amount of your retirement income.
It’s smart to work out a plan with your investment manager for when your aggressive investments will start to convert to more conservative investments. 80/20 split is good when you’re young but that should change as you age. As you approach retirement and don’t want to be at that risk level your manager will adjust your holdings to better reflect the time remaining until you retire.
Get Started Today
Don’t try to wait for a major market correction to start investing towards your retirement. Long term investments are affected less by short term market changes so you shouldn’t be trying to time anything. The smart way to do it is to put a fixed percentage of your monthly income into your retirement account and don’t touch it. Don’t panic on a market downturn and maybe don’t even check your retirement account every day. It is a psychological roller coaster to watch the market when you have your money tied up in it, especially when it’s going down. Just remember, you’re investing for retirement and there will be cycles that you can out wait.
