Where would you rather retire: on a yacht in the Mediterranean, or in a leaky cardboard box on the street?
If you said “a box on the street,” then we have great news! You don’t need to do any planning or saving. But if you want to grow old in style, you’ve got to start saving now. That’s the bad news. The good news: Through the magic of compounding interest, a little saved now can be worth big bucks when you’re old and gray.
Unless you're a Bighead type who already made his millions working in Silicon Valley, this is exactly how much you should be saving for retirement, and how you should be saving it.
No excuses. None. Start NOW.
We get it. Money is tight. You’re likely facing tons of student loan debt right now, and your paycheck is probably the lowest it will ever be. It’s hard as hell to save. But if you want to retire rich, you absolutely have to start now.
But can you manage to scrape up $100 a month? If you invest just that much in a Roth IRA starting at age 25, you’ll have a cool million in it by the time you retire. But if you wait until you turn 35 to start making those $100 deposits, you’ll only have $300,000 at retirement. The math only gets uglier from there if you keep waiting.
Choosing a Roth IRA here is key. Unlike a 401(k), you can’t deduct contributions from your income taxes this year. But any profits from your Roth IRA investments are all yours, tax free, when you retire. Plus, if you get into financial trouble, you can withdraw your principal from a Roth IRA before you reach retirement age without penalty. It’s a great choice if you don’t expect to pay a lot in income taxes this year, or want to save up money to buy a house.
Never, ever pass up free money
If your job offers you a 401(k) retirement plan, you definitely want to participate -- your contributions are tax deductible, so you have even more money to invest. Financial planners say you should save 15 percent of your salary, including any matching contribution from your employer.
But if you can’t swing 15 percent right now, that’s still OK. You should still contribute at least as much is required to get the full employer match -- typically 3 to 6 percent of your pay. It’s literally free money. And even the littlest Simpson can appreciate that.
Spread out your sta$h
Tech stocks have been on fire recently. Cryptocurrencies such as bitcoin have shot to the moon, too. But be careful betting your entire future on just one industry or company or you could lose it all. Experts say you need to spread out your stash.
First, you want to own different types of investments, say, stocks, bonds and real estate, so a sharp drop in any one of those sectors won’t ruin you. You’ll also want to diversify the stocks and bonds you own, so one company falling apart won’t cause you to fall apart.
You should also invest some money internationally. And finally, you should invest your money consistently over time -- don’t worry about timing the market.
Want something more specific? Of course you do. Don’t invest more than 20 percent of your retirement in the company you work for. And don’t invest more than 20 percent in any one industry, such as banks or tech makers. After all, if you went all in on tech at the end of 1999, you’d have lost more than 75 percent by August 2002.
Get someone else to mix your money
Having the perfect mix of retirement investments used to be super complicated. These days, though, it couldn’t be easier. Because, just like Mr. Burns in The Simpsons, you can get someone else to do it.
One of our favorite easy-peasy investment options is a “target date” retirement fund. Offered by many employers and investment firms, these funds automatically rebalance themselves against risk as you approach retirement age. Blackrock’s LifePath Index 2050 Fund, for example, is heavily invested in stocks now. But in 20 years, the fund will have sold off much of its stock to invest in bonds and other safer investments. It’s a pretty good set-it-and-forget-it way to go.
That said, be sure to pay attention to the fees charged by funds, too. Many index funds offer fees of 0.1 percent or lower, which lets you keep most of your money. Others charge fees of 1 to 2 percent or higher. Skip those. After all, high fees could cost you hundreds of thousands of dollars over the course of your life. It’s definitely worth it to shop around.