It’s never too early to start thinking about retirement. Yes, even if you’re a Millennial. These investment tips will get you on the right path to a great future.
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The Big Secret to successfully investing is to start early. The longer you save money, the more you’ll have in the end when you need it. Easier said than done, of course. But here are some tips to help you get to your goal.
Set up an Employer’s Retirement Plan
Many employers have some form of tax-qualified pension plan. That is a plan where you contribute to a kind of savings plan, before being taxed. As the money in that plan sits there, it gains interest, which is not taxed. The 401(k) is the most common such plan. There also exist 403(b) plans (for school employees and the like), as well as 457(b) plans for governmental employees.
The reason you want to start to contribute to a 401(k) is because it’s the perfect “set it, and forget” plan: You tell your employer to deduct from each paycheck some amount, and add it to your plan. You can’t spend what you don’t get, after all! Some employers even match funds, meaning they will add, say 50 cents for every dollar you add. That’s pretty much free money! The money will grow over time. If you are able to invest all or a portion of these funds, you might want to do so. See below for tips on picking stocks.
Set up a Personal Retirement Plan
401(k) plans sound great. But what do you do if your employer doesn’t offer one? You can set up an Individual Retirement Account. These, most commonly, come in Traditional IRA and Roth IRA flavors. They work very similarly to the aforementioned 401(k) plans, but differ in that you either add pre-tax money, or post-tax money to them. There many more nuances than we can get into here, but there is a wealth of information on the differences between a Traditional IRA and a Roth IRA online. You can invest your money in stocks, bonds, and ETFs like you can in a 401(k), too; so that will help your money grow even quicker.
You want to set up an IRA plan as soon as you can, because banks have terrible interest rates at the moment (for the last decade, actually!). Your money will grow very, very slowly in a bank, whereas in a 401(k) or IRA, it could take off like a rocket.
How much do you spend on coffee, on average? Would you be surprised to know that most Americans spend about $1,100 on coffee per year?
Think about skipping a cup once in a while, and instead, saving it. Or better yet, investing it. What if your parents had the foresight to buy Starbucks company stock on the first day it went public? On June 26, 1992, $SBUX was worth $0.3359. That’s thirty-three and a half cents. If they invested $1,100 at that moment, and now, 24 years later when the stock is worth $55.15 per share, it would be worth $180,616.25 (not counting dividends). And what if you were investing $1,100 every year until retirement? One word: Multi-Millionaire.
From a few cups of coffee per week.
For every Starbucks, there’s a Pandora, however. Pandora stock opened on June 15, 2011 at $17.42 per share. Five years later it’s at $11.42. So your initial $1,100 investment is now worth about $719.46. So how do you pick the right stocks..?
How to Pick the Right Stocks
The problem with picking the right stocks is that there is no way to predict the future. For every Google, there’s a Yahoo! You never know which will take off, and which will tank. And even if a company does well, what if its sector (Tech, Medical, Oil, etc) doesn’t do so well, and it drags the value of your company down? Financial gurus tell us to diversify, which is to purchase stocks in a variety of sectors and asset classes. Sounds hard, but it’s not, though. The secret to investing is ETFs.
Exchange Traded Funds (ETFs) are basically baskets of stocks that are diversified, which protect from the ups and downs of owning individual stocks. There are thousands of ETFs to choose from: those that focus on U.S. stocks; those that focus on foreign stocks; tech stocks; real estate; etc.
We are partial to the following Vanguard Group ETFs
- VYM – Composed of big companies like Microsoft, Johnson & Johnson, and Verizon, this ETF seeks to help your money grow via high dividend yields. So in addition to the value of your portfolio growing as the individual stocks increase, you’ll get a steady stream of income via dividends.
- VNQ – If you’d like to invest in real estate, but don’t have money for a down payment on a house, what about buying a piece of a mall, hotel, or office building? This fund does just that, and can yield great returns.
- BND – A little more boring, but boring is good when it comes to your money. This fund is composed of several rock-solid U.S. bonds, which give you steady income and are less volatile than company stocks.
These ETFs, are by no means the only ones you could invest in. There are dozens, if not hundreds, of companies that offer ETFs. Do your homework, and and watch out for high fees.
The Easy Way
The easy way to invest is with a TDF: a Target Date Fund. This is a mutual fund that you buy shares of and hold on to until you retire. For example, the Vanguard Target Retirement 2040 Fund ($VFORX) is a fund that is skewed toward growth of income early on, and then glides to preservation of capital as retirement age approaches. It’s a diversified fund, and low-cost, too (because it often takes money to make money). For many young people this is the perfect way to save for retirement: buy shares in a TDF, a little bit at a time, and reap the rewards come retirement age.
This advice may seem overwhelming for those where the reality is that retirement is an unfathomable distance away. But it’s there. You’ll get to it before you know it. When you get there, are you going to regret not saving or investing your money early on? Or are you going to thank yourself while sipping your Mai Tai in a tropical resort?
10 Financial Milestones to Achieve in Your 20s and 30s
- The Elements of Investing by Malkiel and Ellis
- The 5 Mistakes Every Investor Makes by Mallouk
The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.
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