We all delay things; some of us do it more than others. I get it—when you’re in your twenties or even thirties, thinking about retirement feels like looking at something far off in the distance. This lack of urgency is a big mistake!
Here’s Why
Can you save half of your income? Probably not! But, in essence, that’s what you’d need to do for a comfortable retirement if you relied solely on saving. The thing is, simply storing money away doesn’t cut it because the interest on a regular savings account is laughable. Instead, you need to invest. Investing in stocks, 401ks, mutual funds, IRAs, and other investment options gives you significantly higher returns. This means you can set aside a smaller portion of your income and still get better results.
But…
Investing in stocks, mutual funds, ETFs, and REITs does come with more risk than a standard savings account. However, higher risks often lead to greater rewards. The trick to handling this risk is starting your retirement plan early. Starting early gives you the advantage of time, so if you make a mistake, you have plenty of opportunities to correct it. Without early planning, you’ll have to invest more conservatively, which limits your potential for big gains.
I Don’t Have Enough Money
That’s just another excuse! The amount of money you start with isn’t as critical as getting started. Even small contributions can get you into the habit of investing, a habit you’ll need throughout your working life. You can kick off with as little as $500 to open an online account with E*Trade.
Seek Every Advantage
No one knows everything about investing. Keep reading and learning about the subject because knowledge is power, especially in investing. As you learn, stick to investments you understand. Starting early also means your knowledge can grow along with your retirement savings. If your company has a 401k with an employer match, make sure to contribute enough to get the full match—anything less is leaving money on the table.
Taxes are another important factor in retirement planning. Understand the tax implications of your investments for better outcomes. For example, use IRAs to defer income taxes until retirement when you’re likely to be in a lower tax bracket, reducing your tax burden. While it’s good to be tax-conscious, don’t let tax considerations make you pass up good investment opportunities. Remember, today’s tax code might be very different from tomorrow’s.
Risk
Balancing risk and reward is crucial. Accept that not all your investments will work out as you hope. Always consider the downside risk of an investment and decide if you’re comfortable with that risk financially.
For those who aren’t math whizzes, the rule of 72 is an easy way to estimate how long it will take your investment to double. Simply divide 72 by the annual rate of return. For example, if an investment offers an annual return of 6%, it will take about 12 years to double (72 ÷ 6 = 12). This simple calculation can help guide your decisions.
In summary, start early, even if it’s small. Learn as you go because knowledge is powerful. Invest in what you understand. Accept that there will be losses and risk only what you can afford to lose. Be careful, but not overly cautious. Time is your friend, and procrastination is your enemy.
H. D. Carver is an American currently living in Cagayan de Oro City, Philippines. With years of experience in financial services, he’s held roles as a manager for Fidelity, a vice president at a large regional bank, president of a financial services company, and Manager of Administrative Services and Support for Aon Corporation. He has been a freelance writer for four years and currently writes for Your Finances Simplified.
