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…

The Roth IRA and An Employer Provided Retirement Plan

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.

We Invest For Retirement to Create Enough Income to Support Our Lifestyle

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.

The 25X Rule Will Help Guide You on How Much You Will Need Saved For Retirement

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…

• $2,000 per month, or $24,000 per year, you would likely need to have around $600,000 saved.
  
  
• $5,000 per month, or $60,000 per year, you would likely need to have around $1,500,000 saved.
  
  
• $10,000 per month, or $120,000 per year, you would likely need to have around $3,000,000 saved.
  
  

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.

How To Prioritize Your Retirement Contributions

1. At an absolute minimum, I recommend that you contribute up to the employer match in your 401K.
   
   
   • For example; if your employer will contribute up to 4% of your salary, then please find a way to contribute up to 4% of your salary. Those employer contributions are “free money” or truly part of your compensation. Take advantage of it.
     
     
2. Then, if you are income eligible, I would be looking to max out my Roth IRA contributions (currently $6,000 per year, or if age 50+ $7,000).
   
   
3. If you have already maxed out your Roth IRA, then I would refocus my energy on maxing out my employer provided retirement plan. The 2022 maximum contribution to employer provided retirement plans is $20,500, and if age 50+ it is $27,000.
   
   
4. Then (or in combination with #3) , utilize the backdoor roth method for those who are not able to contribute directly to the Roth IRA in #2.
   
   

Working towards that max contribution is a significant goal that I’d like to see you achieve over time!

But… What IF I Need The Money Earlier Than 59 1/2?

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.

• Social Security. We don’t know what will happen with social security 20+ years from now. We can’t rely on that fully, and it likely will not provide you with what you need to live your lifestyle anyway. It will assist, not cover anything.
  
  
• Pensions. Guaranteed streams of income after retirement based on a number of factors relating to their employment. A promised check every month through retirement.
  
  

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.

Even Though Retirement Accounts Have Restrictions – In Most Circumstances – I Like Them More Than Taxable Accounts

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:

1. Investing is not a short term game so you shouldn’t be looking for “quick returns”. You cannot guarantee a positive return on your investments on a year to year basis. But history has shown, if you zoom out over a longer time horizon, we are more likely to get a significant return on our investment portfolio.
   
   
2. Taxable accounts are exactly that – taxable. Retirement accounts have preferential tax treatment whereas taxable accounts will require you to pay tax on any income earned in the account.
   
   
3. I have an appreciation for forced savings. Remove the temptation. If it’s accessible to you, you will likely try to find a way to justify withdrawing the funds and using them even if they are earmarked for something completely different. Retirement accounts serve as that forced savings.
   
   

How to Get Comfortable With Retirement Investing

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.

Resources:

Read here to learn all about the Roth IRA

Learn About the Backdoor Roth IRA Method

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