Investment advice on saving for retirement – now!

Start your investment plan – now! Your future portfolio will thank you

“There’s no time like the present”, especially when it comes to investing. Young adults have a great advantage over other investors: time.

Compounding – The benefit of time is that is allows for interest to compound, which is the ability of an investment to grow by reinvesting earnings. Consider that a single $10,000 investment at age 20 would grow to over $70,000 by the time the investor becomes 60 years old (based on a 5% interest rate). By comparison, the same investment made at age 30 would yield about $43,000 by age 60, and made at age 40 would yield only $26,000. The longer money is put to work, the more wealth it can generate in the future.

Matches – If your employer offers an employer-sponsored retirement plan, like a 401(k), we suggest you enroll in their plan. Not only is savings made easy through automatic payroll deductions, but your contributions are made with pre-tax dollars. Additionally, many employers offer 401(k) matches, which means they will contribute money into your account. If you don’t take advantage of this benefit, then you are leaving money on the table.

Resources – Another advantage young people have is there are now, more than ever, many low-cost services available to make saving and investing easy.

  • Consider the Acorns app. This app rounds up each transaction you make with your debit or credit card to the nearest dollar and invests the change into a diversified portfolio.
  • Robinhood is another useful resource. This app offers commission-free trading of listed stocks and ETFs. They run a lean company which allows them to operate for less. They make their money by accruing interested on investors uninvested cash balances and through fees charged in their upgraded version. This is a low-cost means of entering the investment world.
  • Check out Betterment.com, a robo-planner website for investing using ETFs that holds down fees. You use this to invest your taxable funds and your retirement plans, like IRAs.
  • Also check out earthfolio.com, a robo-planner for investing “with a social conscience.”

Whichever form of investment you decide to take, the earlier you begin, the better. Start building your wealth now! See also: Young people, don’t let this happen to you. Plan for retirement now!

 

[As we have stated in past posts, we recommend investing passively, using ETFs or index funds, so you save fees. You can buy a diverse set of ETFs, set up your portfolio and sleep until you rebalance next year.]

5 Things Every Young Person Should Know About Retirement – You’ve got time, so use that time well!

If you are young, you’ve got time, and if you use that time well, you may even make up for the possibility of no pension and no Social Security benefits.

1. You won’t have what your parents had – no pension and no social security. Millennials are the first post-war generation to face retirement with virtually no pension. Fewer than 7% of Fortune 500 companies offer pension plans to new hires. Also, the way that the Social Security system is currently funded, there will be no reserves by 2033. Social security benefits are paid to retirees from the tax withholdings of the current workforce and also from the Social Security Reserves. Once the reserves are depleted, it is estimated the tax revenues the collected at that time will only be enough to pay out three quarters of the scheduled benefits. There are measures Congress could take to head off this eventual depletion, like changing the benefit formulas, raising payroll taxes or increasing the cap on taxable wage income. Until any changes are actually implemented, don’t count on any benefits!

2. Learn how to save and spend – now! It’s never too late to adopt good spending and saving habits, and the sooner you do it, the better. The more you can set aside that is invested now, the better off you will be. Also, avoid accruing any high interest rate debts. You can make your coffee at home if that is what allows you to max-out contributions to your 401(k) plan, especially if your employer matches what you contribute. If you do not have employer-sponsored plan, open a Roth IRA or even a traditional IRA. It’s a lot easier to put money aside now than it is to play catch-up in your 40s. And you can set up auto-debits so the investments are made as soon as your paycheck hits your bank account – keeping it out of your shopping slush fund!

3. We’re living longer, healthier lives. Longer, healthier lives are good, but they also require more investments at retirement. If you hit the Social Security full retirement of 67 now, the Center for Disease Control estimates you will live to around 86. That’s 19 years of retirement that you need to fund. But, if you are younger, living a longer, healthier life, then you will likely live longer, requiring more funds, unless you choose to work later in your life.

4. The good news is you have time. The Center for Retirement Research at Boston College suggests that, by setting aside money at age 25, you will need to save only about 10% of your annual income to retire at 65. If you wait to save, the percentage you need each year increases. If you wait ten years, starting at age 35, your target savings increases to 15%. Wait until you’re 45 and you’ll need to save 27% of your annual income. Imagine if you were 55 today and wanted to retire at age 67? The message is: don’t wait!

5. You also have great resources. With smartphone apps and do-it-yourself trading services, investing is more accessible and less costly than ever. Also, there are more affordable investment products available like ETFs (see our post), so you avoid high fund manager fees. Saving on fees means more to grow for your retirement. Over the course of 40 years, those fund manager fees add up to real money.

In sum, start saving now. Set up a simple portfolio and adjust it as you go along. The time you’ve got now will reward you later!

The results from retirement calculations on different websites vary. Why?

Results from online financial calculators are not equal. But, why do the results differ? Usually, it is because different assumptions were used. That is, the calculators control the variables in different ways.

Performing complete and accurate calculations well is difficult, and thus designing a web-based calculator can be expensive. The variables a retirement calculator must address include rate of inflation, rate of return on investment, life expectancy, how much of current salary you need to support yourself at retirement, and social security benefits. Some calculators offer Monte Carlo simulations (click here for an explanation of Monte Carlo Simulation ) to help you predict your retirement funding. On this, my vote is to ignore the Monte Carlo simulation for the same reason many websites will tell you not to count on past returns as to predict your future investment results.

Some calculators allow you to alter their assumptions. However, none of them is able to accommodate either decreasing spending in later years, which is typical of most people during retirement, or the cost burden of major health problems. Any attempt to address these issues would be quite costly.

Others take an easy out by limiting variables, e.g., keeping your contributions flat. This facile solution provides little insight into what your retirement savings will actually look like because it ignores your ability to save more as your income increases. Also, by assuming flat contributions, your need to act will look more urgent due to the big shortfall in saving to meet your retirement goal. The company using this assumption may hope you contact them to help you solve the retirement problem that their formula, in part, has created. A calculator that assumes annually increasing savings makes more sense.

We have designed formula for the website we launched in 2015 (then took down in 2016). Our approach allowed you to alter almost all variables. This may or may not be a good thing, as shifting some variables too much could lead to unrealistic results and misdirect you. Nonetheless, this approach should allow you to test all of your concerns so you can establish a good retirement strategy.

In the end, using any of these calculators gives you a sense of where you stand //vis a vis// your retirement goal. If you are far off, it gives you impetus to act so you get on track; and if you are on track, then you it gives you a sense of security. For me, the most important result from using any calculator should be assessing and sticking to a good strategy for saving and investing with a long-term perspective.

Here are links to the most popular retirement calculators, which will come up in a web search:

AARP, Bloomberg, CNN, Fidelity , Schwab and Vanguard.