Some people view investing in the stock market as a chore. Others see it as a fun hobby, and there are those who are practically obsessed with it. Most of us view investing as a necessity for building wealth on the road to retirement.
But regardless of where you end up in that spectrum, the first steps are often the hardest, and many people just don't know where to begin. They find it too daunting, too complex, or too risky. Those folks should know that investing really isn't rocket science (although if you know a lot about rocket science, there are certainly some stocks to consider). In fact, you can build a comfortable retirement nest egg if you're willing to save and stick to a simple strategy. Here's how.
The one thing you need to do
The first no-brainer thing you can do is invest in an employer-sponsored retirement plan, like a 401(k), if one is available to you. Employer-sponsored plans are important because they typically offer free money in the form of a company match with most employers offering a 4% to 6% match. That means that if you invest 4% of your annual salary in your 401(k), for example, the company will match that amount. Just keep in mind that not every 401(k) match will be the same, so be sure to understand the different amounts, types, and vesting periods for your plan.
Otherwise, the investment options in a 401(k) plan are limited and typically include mutual funds, baskets of stocks that either are professionally managed or track a major index. Among the options are growth-oriented funds, which are designed for long-term growth but more prone to short-term volatility, and value-oriented funds, which are less volatile but typically don't generate the same level of long-term returns.
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Most 401(k) plans will also offer what are often referred to as target-date funds. Target-date funds are professionally managed by the investment company for the year you plan to retire with appropriate tweaks to the fund's holdings over time. So if you're 30 and plan to retire in 2055, you would invest in a 2055 target-date fund -- or the closest one to it. It really doesn't get any easier than that.
If don't have access to a 401(k) or other employer-sponsored plan, there are other tax-advantaged retirement accounts to consider. Options like a traditional IRA or Roth IRA will also allow you to start building your nest egg. These accounts offer a much bigger menu of investment options, including individual stocks, exchange-traded funds (ETFs), and more. With simplicity in mind, look at index funds, which track a major market index like the S&P 500. Almost every major money manager offers its own version of an S&P 500 fund. There are also index funds that track the growth-oriented Nasdaq-100 index, the small-cap Russell 2000, and just about everything in between.
Though your IRA might not come with free money in the form of a company match, the ETFs mentioned above often enjoy a much lower expense ratio than what many mutual funds and target-date funds charge within 401(k) plans.
Adding it all up
The average 401(k) plan returns about 5% to 8% per year.
Let's say you earn a $50,000 salary (with a 3% annual raise) and start by investing 6% of that in your 401(k) plan at age 30. Your employer offers a dollar-for-dollar 4% company match, and your investments return 7% annually. How much would you have in 35 years at retirement? Your 401(k) balance would slightly exceed the common $1 million milestone.
If you're a little more aggressive with your investment choices and manage to match the long-term performance of the S&P 500 with its 10% annual return, your account balance would climb to over $1.5 million.
For those of you without access to a 401(k) plan, you can still achieve impressive results. Even in the same scenario above without a 4% match, 35 years of consistent saving with a 10% average annual return will see your portfolio end with $1.1 million. Strive to put away more of your salary each year, and that number will grow accordingly.
So no, you don't need to be an investing expert to save money for retirement. What you need more than anything else is discipline and time. Start as soon as possible, and take advantage of any available benefits like 401(k) matching and low-cost index funds to make the journey smoother.
