Investing for retirement is usually not a topic of discussion among new graduates. Most Millennials would rather talk about Pokemon Go or Game of Thrones, Two things I have thankfully not gotten sucked into yet.
A discussion about student loans may follow. And then maybe how crappy the economy is and how hard it is to find a good job or start a business.
But talking about retirement or when to stop working full time is not usually a riveting discussion. Some just don’t understand how retirement accounts investments work, and they don’t care to learn. Others dismiss the idea of retirement altogether, claiming that they will just work for the rest of their lives.
Sounds like committing yourself to a life sentence.
If you’re self employed or work for a large company, you need to talk about retirement. If you have the most fulfilling and rewarding job ever, you still need to talk about retirement. That amazing job may not seem to fulfilling 20 years from now.
In the business world, you need an exit strategy. You have to plan for how you’re going to leave your work and set things up so you have enough money to live on. This is what retirement planning is in a nutshell and the earlier you get a plan set up, the better off you will be.
And the ONLY way to give yourself a shot at a great life post work is to invest.
Why is Investing Necessary?
Being able to save money is an essential step to having good retirement income. And finding a way to make that money grow is just as essential. But why? Can’t you just put money into a savings account or under your mattress and not bother taking investment risk?
No, you can’t. If someone makes $100,000 per year and is able to save 10% of their income into a regular old savings account every year from age 30 until when they retire at age 60, they will have $300,000 saved up. Not a bad sum right?
Wrong. This person was living on $90,000 per year during their working years. Having $300,000 in the bank mean they can live the same type of life for a little over 3 years. Even if they cut their cost of living in half to $45,000, that’s still just over 6 years worth of money. Average life expectancy is around 78, so this person still has a decade or so to live with no money in the bank.
So this person was able to save a decent amount of money for decades and will only be able to survive on their own for 3 years? How can anyone live a long and fulfilling retirement? By investing their money, that’s how.
Run Your Numbers
It’s all a numbers game at this point. This person could decide to either work a lot longer, save a lot more or live on a lot less. Saving 10% per year for 30 years is actually a pretty good savings rate in this day and age, so I’m not sure how many people would be willing or able to do more.
Obviously, we should always be trying to save more and live on less. That is the cornerstone of personal finance. But even better would be to combine those ideals with investing, which allows your money to grow and compound over time.
What would change if this person decided to invest that $10,000 a year into a retirement account instead of a savings account? After running through some retirement calculators I found that at a conservative rate of return of 6%, this person would have a little over $637,000 to spend in retirement after taxes are accounted for.
You read that right, just by putting their money into a retirement account instead of a savings account, you are able to more than DOUBLE your money. Now being able to invest like this does require some education and up front work, but not really too much. And I would say it’s well worth it if you can double your money.
This is the power of investing and this is why everyone, even new grads saddled with student loan debt, needs to start investing early and give their accounts lots of time to grow.
Where to Start?
Stocks, bonds and mutual funds. Investment properties, house flipping and wholesaling. Commodities, start ups, local businesses, your own business Bitcoin, and peer to peer lending are just SOME of the ways you can invest. Where is a new investor supposed to start?
It can be overwhelming when you look at all of the options out there. And each type of investment has its own world of information to learn. But the best place to start would be a 401k. If you work for a company they probably have one and if you’re self employed you can open one for your business.
The reason I recommend starting with a 401k (or a Traditional IRA if your workplace doesn’t have one) is because the contributions you make are tax deferred and so is any growth in the account. This is very advantageous especially if you start contributing early in your career and give the account time to grow. Once you choose what type of investments you want, start contributing regularly and watch your net worth skyrocket over time.
My next piece of advice would be to do research! No one can walk you through investing step by step because there is just so much information available. Do some research on different ways to invest, such as real estate or dividend investing. If something strikes your fancy, look into it some more and see if it’s worth putting your money in.
Investing is one of those things that are east to get into but difficult to master. But you don’t have to be a master to have a stable retirement. You just have to start early and let your money grow.