One of the most frequently asked questions I receive is, how do I start investing? The majority of the time, individuals will have the option to invest in their employer provided retirement plan and they may be contributing 3-5%, if that. But they always want to know, how can I invest more?
My answer typically is, within your retirement account.
The best ways to start investing are through two different investment accounts…
It’s not sexy, it’s not a fancy option that gets you all excited. Most investing isn’t.
But as a starting point, I cannot say this enough, your 401K/403b/457 and a Roth IRA will be the two best places for you to begin investing.
The goal of investing for retirement is to provide the investment account years and years of compounding growth to create enough income from the account to support your retirement lifestyle. Don’t forget, no more paychecks are coming during retirement for most of us.
So let’s run through a couple scenarios to give you an understanding of the funds that would be required to support your future lifestyle.
A great rule of thumb is to multiply your required retirement annual income by 25. This in turn may support you drawing 4% from the account on an annual basis after retiring at age 65. (Factors that may impact this include inflation, your investment allocation, market volatility, your retirement age).
As an example, let’s say you retire at age 65 and no longer have a reliable, steady stream of income coming in. If you wanted to spend…
This is a guideline, not a perfect science. There are many factors that go into the success of this, as noted above, but this will serve as a helpful foundation for you as you continue to save for retirement.
Working towards that max contribution is a significant goal that I’d like to see you achieve over time!
Age 59 1/2 is the age that you are able to take withdrawals of contributions and earnings from your retirement accounts, penalty free. (If in a Roth, you are able to take out original contributions any time).
But I cannot stress this enough, let’s not forget the point of the retirement account. It is to save for retirement, plain and simple. We cannot discount the importance of having money set aside for ourselves in the future when we no longer have a steady stream of income coming in.
The types of retirement savings our grandparents and parents relied on may not be the same for many of us.
Many of us may not be able to rely on either one of these options. So when someone comes to me and says, well, what if I need the money? I would say, there may be an option for you to withdraw if you must, BUT please find another option.
The money in your retirement accounts purpose is to be available to you during retirement. So unless you have significant income or wealth coming your way from other sources, it is imperative that retirement savings is made a priority.
Here’s the thing, I understand the notion that investing for retirement really doesn’t sound all that exciting. Just tucking money away for my future and won’t really get access to it until I am 59 1/2? There has to be another way. There is. They are called taxable investment accounts.
But I really don’t see the need in prioritizing investing in a taxable account over a retirement account for you to have “access” to the cash for a few reasons:
Understand your short term goals. What do you need in the next 5 years? Are you saving for a down payment, a business venture, etc. What amount do you need in the next 5 years? And create a savings plan for that and set it aside in a higher yielding cash account or short term cash alternative.
Automate investing towards retirement. Automate your investing so you don’t have to think about it. You learn to live on the amount that hits your bank account, not the amount that your salary states. Learn to live on a little less and prioritize automating these retirement contributions.
Have an emergency fund set aside. If you own a home or have children, I’d like to see this number somewhere between 3-6 months worth of monthly spending set aside for emergencies that may arise in the future.
Between your income, short term goals savings and your emergency fund, those should support your cash flow needs. Thus leaving you with your long term investments earmarked for retirement!
The Roth IRA & your employer provided retirement plan are, in my opinion, the best way to start investing.
Read here to learn all about the Roth IRA
Learn About the Backdoor Roth IRA Method
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