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What do I need to know about retirement planning, if I know nothing?
July 8, 2014 7:24 PM   Subscribe

I'm late to start investing for retirement (early 30s) and don't know where to begin, other than a vague sense I should invest in mutual funds and maybe bonds and eventually real estate. What do I need to know before putting my money somewhere?

I don't have any debt, but also don't make that much money (especially for the expensive part of the country where I live). I also work as a freelancer, so I don't have the option of employer matching for a 401(k). Should I hire a financial advisor? How much research do I really need to do before picking investments? It's not something I want to spend a lot of time on, and I'd also like to start socking some money away asap. What is the bare minimum I need to know? Is there a good book I should read?
posted by three_red_balloons to Work & Money (13 answers total) 46 users marked this as a favorite
 
I could tell you to read the The Bogleheads' Guide to Retirement Planning but it's probably overkill because basically given your situation the bare minimum to know boils down to:

* Save up the minimum amount for the fund aka $1000
* Open up an account with Vanguard
* Put the money into a suitable target retirement fund
* Keep putting money into that fund!

Which is really easy! You can currently put a total of $5,500 in contributions in it per year and you have until April 15th of the NEXT year to make them.

It does look like you can also look into something called a SEP-IRA but that looks way more complicated. The above you can do right now with little effort. And fortunately for you, research shows that you shouldn't be trying to pick investments yourself; you are far, far likely to do better by putting your money into a low cost index fund and just ignoring it. The Vanguard target retirement funds automatically rebalance as time goes by to the appropriate levels of risk vs growth.
posted by foxfirefey at 7:42 PM on July 8 [6 favorites]


Huh! It looks like the IRS has a guide on your further options past the easy peasy ROTH IRA one: Retirement Plans for Self-Employed People. And Vanguard still probably has you covered for those things: Individual 401k and SEP IRA.
posted by foxfirefey at 7:48 PM on July 8 [1 favorite]


As a very rough estimate you need to end up with 25X what you think you'll need to live on each year in retirement. So if you think you need $50K a year from retirement savings, you want to have $1.25 million in the bank at retirement. The basic theory is that you can take 4% out each year with a 99% certainty that you won't run out of money before you die.

And I second Vanguard as the way to get there.
posted by COD at 7:53 PM on July 8 [1 favorite]


Foxfirefey smartly summed up what I would describe as the "bare minimum." There's nothing at all wrong with starting at the bare minimum. Retirement planning is one of the best examples of an endeavor where the perfect is the enemy of the good, and a good plan today beats a perfect plan tomorrow.

Here is a good post from, in my nonexpert opinion, the best financial blog around. They have covered retirement and IRAs many times. Check the archive.
posted by cribcage at 7:57 PM on July 8 [1 favorite]


Ugh, I am so sorry for being so spammy, but for my first comment, I am talking about a opening up a ROTH IRA (and apparently forgot to add that tidbit). The basics of that are that you contribute after-tax dollars and then your distributions aren't taxed when you take them out of retirement. A double edged sword about ROTH IRAs is that you can also withdrawn your contributions (but NOT your earnings) tax free at any time.

They are usually recommended for people who expect their income in retirement to be greater than their current income, but in your instance it is really great because it's so little overhead and worry that you can start it up right now without much fuss while you figure out your other options.
posted by foxfirefey at 8:01 PM on July 8


I would do this: Open an IRA. Within that vehicle, invest in a stock index fund for the next few years, as you settle into your work/career path. I would not be concerned about a financial advisor until you are in a more predictable situation. A targeted retirement fund is great for someone in his late 40s or later who makes significant money. It does not sound like you are there yet.
posted by yclipse at 8:35 PM on July 8 [1 favorite]


Here's the important stuff to know:

- You are not late, you are fine.
- At your age you can invest aggressively in stocks
- Stocks meaning mutual funds meaning index funds meaning low fee index funds meaning Vanguard or Fidelity
- Invest only in highly diversified index funds like S&P 500 or total market index
- Set up automatic monthly investments because if you are like most people you won't have the discipline to invest regularly and you will procrastinate
- Don't try to time the market or outguess the market and don't watch the daily, weekly, or monthly movement of market prices and don't panic sell if the market goes down
- You don't need to read a book, but if you want to, a new one you could read is The 3 Simple Rules of Investing.
posted by Dansaman at 9:42 PM on July 8 [1 favorite]


Keep this in mind...
-Mutual Funds are one of the most highly feed investment options
-Most Financial Planners jobs are not necessarily to help you manage your money, but to acquire more accounts for their companies. The last Financial Planner I used was happy to take my check, but when the market crashed in 08, he just kind of shrugged it off. I hired him to be a good steward of my capital, and I fired him to be a good steward of my capital.
-I decided to take it upon myself to get educated on how the markets work and have learned how to make money when the market is up, down, or sideways. My returns now are far better than when I was merely riding out my mutual funds.

No offense to anyone that is a Financial Planner in the hive, this is just IMHO.
posted by keep it tight at 5:57 AM on July 9


foxfirefey mentioned the Bogleheads book, but another good resource in that world is the Bogleheads wiki. Here are some good articles laying out the basics:

Bogleheads investment philosophy
Asset Allocation
Three Fund Portfolio
Roth IRA

The forums on that site are good too but tend to be more in-depth and detailed, not as great for getting an introduction to the concepts.

You don't need a financial planner at this point. You can read these articles or Get Rich Slowly (agreed with cribcage, it's a great resource for personal-finance stuff) to get your head wrapped around the terminology.

IRAs and Roth IRAs are tax-advantaged structures; you open one and then you put investments, like mutual funds, into them. Roth IRAs are a good choice. Here is a great multi-part rundown of how they work and how to open one from Get Rich Slowly.

As people have laid out above, the bare minimum is pretty simple:

1. Open an IRA or Roth IRA at a low-cost place like Vanguard or Fidelity. You should try to contribute up to the limit ($5500 last year) every year.
2. Choose what kind of investment you want to put in it. A targeted retirement fund or a low-cost index fund would be good. Target retirement funds are just mutual funds that choose the stock/bond mix for you based on when you're going to retire and shift it over time automatically. They are slightly more expensive than plain ol' index funds, which are just mutual funds that track a subset of the stock market at large and aren't actively chosen by a manager. If you want an index fund, the Vanguard Total Stock Market Index Fund is a often-recommended option. At your age having mostly stocks is good.
3. Set up an automatic savings plan to contribute money to this fund every month.

Aim to get the terminology figured out and get yourself contributing regularly to an IRA/Roth IRA. You can go from there but that is a great starting place.
posted by aka burlap at 7:32 AM on July 9


Investing for retirement is really an emotional question as much as anything else. All the good financial advice in the world won't help if you see that the market is plunging and sell everything at exactly the wrong time, which is extremely common. So think about your risk tolerance and how you would react in a severely down market, which may be coming along sooner rather than later.

Selecting investments is not really a concern, since you shouldn't choose anything except a target date fund (as recommended above) unless you really know what you're doing. The important thing is to find a way to contribute regularly. Lots of people like the concept of "paying yourself first". With freelance income it's harder than simply depositing a fraction of a fixed paycheck every month, so you may have to experiment to see what works for you. While it's true that you probably should be putting 15% of your take-home away, don't let that number intimidate into putting away nothing. 1% is infinitely better than 0. Increase it over time, especially as your earning power improves or you get a windfall. Good luck!
posted by wnissen at 9:39 AM on July 9


Also enthusiastically recommending the Bogleheads site. The getting started wiki page should be particularly helpful.

The bare minimum you need to know is:

1. Find a way to invest in a tax-advantaged retirement vehicle--you mention you don't have access to a 401k plan. If you have $5500 or less to invest each year, you can just open either an IRA or a Roth IRA. If you have more than $5500 (the annual contribution limit for these vehicles), you could consider a SIMPLE IRA, an individual 401k, or an SEP IRA--these are all possibilities for people who are self-employed. It's important to invest in tax-advantaged vehicles because the money inside them can grow for years without tax consequences. Not only does the money compound faster, but if you're not making withdrawals, you can buy and sell funds within these accounts without paying taxes on the gains at the time.

2. The only two places you should consider opening accounts are Vanguard and Fidelity.

3. You want a mix of asset classes: basically domestic stock funds, international stock funds, and bond funds. Adding more asset classes (real estate, precious metals, international bonds) doesn't do much to improve your portfolio and probably makes it more expensive. You can always invest in these asset classes later once you learn more. If you want to do the bare minimum, invest in a Target Date Retirement Fund. But don't actually pick the target date based on your estimated retirement date, pick the Target Date fund that has the blend of stocks/bonds that is right for your risk tolerance, regardless of what its "date" is.

4. Invest exclusively in index funds, because there are hardly any fees associated with them, and you're not likely to "beat" the index by picking a more expensive actively managed fund. It's possible you'll be lucky and do this, but it's more likely that you'll wind up worse off in the end if you pick an actively managed fund. Mutual fund fees eat into the growth of your investments over time; Vanguard and Fidelity offer a wide variety of excellent funds with low expenses. The Target Date Retirement Funds are essentially funds comprised of index funds.

5. Don't hire a financial advisor. You don't need to. You can do this on your own.
posted by MoonOrb at 9:40 AM on July 9 [3 favorites]


The most important thing is to just get started. I agree with yclipse - open an IRA and invest in stock index funds. Your time horizon is long and the market has outperformed all other investments over a long time horizon. Index funds carry the lowest expenses. Putting a set percent of each paycheck, even irregular freelance checks, and even a small percent, is the best way to insure that money actually gets set aside. You will also then be practicing dollar cost averaging, At your young age the most important thing frankly is to establish the discipline of saving, and also to keep your expenses low. As you accumulate some money then you can start to worry about getting fancy and hiring professional advisers etc.
posted by caddis at 11:54 AM on July 9


The other advantage of a Roth IRA is that you can withdraw the your actual contributions (not any earnings) early without penalty.

It's a bit of a hassle and it's better not to do it since it undermines the tax advantages, but for me when I have unsteady income and unsteady unemployment, knowing that the Roth IRA can double as an emergency fund if I really needed it to gives me the confidence to save more aggressively for retirement at a time when I teat fear that what I should actually be saving is ready money for rent for my next dry stretch.
posted by Salamandrous at 3:32 AM on July 10


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