This is a guest post by PT of PT Money: Real Personal Finance for a Life Without Limits. When you go check out his blog be sure to download his free ebook 52 Ways to Make Extra Money.
When I think about investing, I have one goal in mind: a safe retirement. I don’t need to get rich quick, or get lucky trading single stocks. I’ve got bigger fish to fry. I just don’t want to have to depend on others when I turn 70. Since I also don’t think that the government or my employer will do anything to prop me up (nor do I fundamentally believe they should), I need to make some preparations.
Today I’m going to talk about getting started with investing for retirement. My intent isn’t to tell you exactly where to place your money. I’m more interested in providing you with a framework, so that you can take a more active role in increasing your retirement savings efforts. I’m also going to present your options in terms of my own annual priority.
I’m assuming you have your unwanted debt cleared out and have a decent emergency savings built up. If you don’t read more on this topic here: Should You Invest or Save for Retirement While in Debt?
Invest in Your Employer’s Options
The first place I’m going to advise anyone to look to begin their investing is their employer’s benefit plan to see the perks. For instance, the 401K match. This is free money that my employer is providing me to encourage me to save for my own retirement. If you have the same option, you should at the very least take advantage of this match.
Some employers also offer great deals on employee stock and allow for stock plan flipping. I do this with my company and there is no risk and I get a great return. I invest the proceed in a Roth IRA.
If your employer doesn’t have these options, consider asking them to. A company called Brightscope.com will allow you to review your company’s peers to see if they offer retirement plan perks. If so, you can use this information to put pressure on your own company.
Look Into Tax Advantaged Investing
After you’ve exhausted all your employer’s freebies and perks, the next logical step in my eyes is to look into tax-advantaged investing. This isn’t as scary as it sounds. It’s basically a type of investing where there is some type of tax incentive involved with the investment vehicle. The most common are the 401K and the IRA.
The 401K (after match) is a great place to start. Again, turn to Brightscope.com to help you determine your 401K plan fees what investment options you have compared to others.
The IRA and Roth IRA are additional account types that you can use. IRAs have lower contribution limits though (compared to 401Ks), and usually lower fees and better investment options. So most people start here with their investing and then fully fund the IRA for the year. Then they return to the 401K to make tax advantaged contributions for the remainder of the year. FYI – This approach can only work with the Roth IRA, since you can’t contribute to a regular IRA and a 401K in the same year.
Move to Taxable Investing
If you’ve done all the tax advantaged investing you can do, now it’s time to turn to investing that is fully taxed. Here you invest with post-tax dollars and your investment returns are taxed as income. You can see why I suggest this type of investment as the final measure. Of course, keep in mind what I said at the beginning. I’m only concerned with investing for retirement. With so many tax advantaged retirement investment vehicles available to you, it’s going to be a while till you get here. Unless you make a significant amount of money each year.
With the contribution limits for IRAs and 401Ks set at $5,000 and $16,500, respectively, you can save over $20K each year before you need to turn to these types of accounts.
Suggested Retirement Savings Priority
To review, here’s how I see an annual retirement savings plan being prioritized. Once you have one completed, you can begin on the next:
- Finish all debt and short-term savings goals
- Utilize employer perks (i.e. 401K match)
- Contribute to a Roth IRA ($5,000)
- Contribute to your 401K ($16,500)
- Contribute to a taxable investing account
I realize there’s more than one way to get to your retirement goals, so I expect some different opinions in the comments. However, I just want to encourage you to think about your retirement savings this way…with these priorities in mind. I think it challenges you to try and take advantage of every available option. Which for me, has led to more savings.
What About Investment Options in the Accounts?
This post is running long, so I’ll leave this for Paul to cover. But I will say that I think it’s okay to keep your investment options simple as long as they have you properly diversified and aren’t costing you tons in fees each year. Choices that fit the bill for me include a mix of low-cost index funds or low cost target-date funds.
Photo courtesy eflon