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How Do I Start Saving for Retirement?
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What specifically do you do once you've decided to save for your retirement? If you're under 50 you go on-line and search using something like "How Do I Start Saving for Retirement?". If you did that you'd get over 400,000 pages from Google and 17,600,000 from Bing. That's a lot of reading! If you explore the first non-sponsored result from Google you go to an article by Leslie Geary at Bankrate.com. (Bing takes you to some nonsense at Yahoo Answers which is why we use Google!) The Bankrate.com article gives you some good advice. There you find that you should:
- Start saving immediately
- Sign up for a 401k if you can
- Use a Roth IRA if no 401k plan is available
- Be aggressive in your investments (if you're in your 20s)
- Get educated
- Build an emergency fund
- Avoid debt
In fact this is good advice. Heed it. The problem is HOW do you do all those things when you have no knowledge of investing or finance. Where do you get the basic information to take the first step? That's why we wrote this article. We want to share our personal experiences in the hope it might help others navigate a tortuous route. We'll only address the first five points since the last two are different topics. Bear with us as we state the obvious because we don't think the obvious is very obvious.
Start saving immediately:
The point here is to start sooner rather than later, sooner being immediately. But, there's a catch-22. How do I save if I don't know where to put my money? Relax, the next two points will reveal WHERE to put your retirement savings. The goal is that you make a decision and DO IT!. Many people just don't save for retirement when they're young. Don't make that mistake. Time is your friend if you use it wisely.
Sign up for a 401k if you can:
An article by www.worldatwork.org reports that 95% of American companies offer a 401k plan (93% with matching contributions). So most should be able to sign up for their employer sponsored 401k plan. How do you do that?
- When you were hired someone gave you forms to fill out, probably IRS W-4s. Find that person or office and ASK them about the company's 401k plan.
- After talking to your company's 401k plan administrator you will have learned a few things:
- Whether or not you are eligible to participate and if not how to become eligible
- That you have to fill out some more forms
- That on those forms you will need to specify two important things:
- How much to deduct (save) from your pay and
- Where you want that money to be invested
- And maybe most importantly, that you don't have a clue where to invest your money!
- Relax for now. We'll explain what to buy under the third bullet point below
Use a Roth IRA if no 401k plan is available:
If you can't enroll in a 401k then open a Roth IRA. Even after you enroll in a 401k plan you still might want to open a Roth IRA, if you can afford to put even more away for retirement. Trust us. Having too much when you retire is better than having too little.
- To establish a Roth IRA just visit Vanguard.com. They will help you through every step to create an account with them. (NOTE: We receive nothing in any form from Vanguard. We simply find them to be the best.)
- Open a mutual fund account with them (versus a brokerage account)
- Sign up for Automatic Investment for ease and consistency
- Sign up for electronic delivery of communications to eliminate an annual fee
2. Read on to find out which funds to buy and how to manage them
Be aggressive in your investments (if you're in your 20s or 30s):
Investing for retirement is easy with one exception; when do I buy and when do I sell? One answer is a strategy called Buy & Hold. You simply buy every pay period and never sell until you actually retire. The assumption is that the economy will grow more than it shrinks over the time you're investing. From 1975 - 2000 this strategy mostly worked. However, since 2000 Buy & Hold has returned ZERO! Maybe the next ten years will be better but we feel there is an alternative to passively waiting.
We monitor the long-term trends of the economic cycles. We do this using indexes which represent these economies and their related markets. For example, the S&P 500 Index tracks the market of the 500 largest stocks in the US economy. By monitoring moving averages of an index it is possible to determine if the long-term trend is going up or is heading down. Many will scoff and say, "If you could predict where the markets are going you wouldn't be worrying about retirement." We don't worry about it but if that's what you're thinking you've missed the point. Economists, governments, and businesses identify these trends all the time using publicly available data and a similar approach. Be clear that they are NOT predicting where the market is heading BEFORE it goes there. All they are doing is recognizing an existing long term trend as early as possible, not predicting it before it happens. True market trend changes are slow and occurred very infrequently. Arguably only eight times since 1970, or only four times since 1994. That gives the attentive investor time to act if they follow the trends.
Here is the investment strategy we use for our personal retirement in its simplest form.
- Decide how much to invest each pay period
- Identify an index based stock fund and an index based bond fund. We suggest these to start:
- VTSMX - Vanguard Total Stock Market Mutual Fund
- VBMFX - Vanguard Total Bond Market Mutual Fund
When the stock market is in an upward trend then buy the stock fund; if not then buy the bond fundWhen the trend of the stock market reverses then reverse your investments
- If you are invested in stocks and the stock market enters a downward trend sell the stock shares and buy bond shares
- If you are invested in bonds and the stock market enters an upward trend sell the bond shares and buy stock shares
So how do I determine these long-term market trends? (Note: Here comes our self promotion) Simple, you can subscribe to our service and we do all the work. When it's time to buy or sell we send you an email. Or you can use any of the many on-line tools that allow you to calculate these moving average charts yourself.
If you want to be more aggressive simply select a more aggressive fund. We suggest VEIEX, an emerging markets fund by Vanguard. Note that you must use an index fund that follows the long-term trends and is not actively managed by a fund manager. You can see all the index funds that we monitor and track on our web site, TimingTruth.com.
In our opinion the financial industry is certainly one of, if not the most, complicated, convoluted, and purposefully obfuscated industries on the planet. As near as we can figure out the only reason for this complexity is that the more confused a customer is the more they can profit. Sorry, but that's the way we see it.
Some might ask, "How can I ever begin to understand?" We would ask in return, "Why do you think you need to understand such a mess?" Your automobile runs just fine without you understanding HOW it works. Electricity usually arrives at your house without you understanding how it was produced or delivered. Why do you want to try to understand the financial industry? Please understand we are NOT encouraging you to be ignorant or stupid. You still need to change the oil in your car and you really shouldn't grab bare electric wires. Our point is that there are a few things that are valuable for you to learn but the vast majority is NOT. So after you've started your retirement if you still want to learn more we think these concepts are important.
- Time is your friend - start investing early and give "compounding" opportunity to work.
- Learn how reinvesting your gains and compound interest (the most common form) works over time to your advantage
- Understand Dollar Cost Averaging and why it helps you
Economies & Markets cycle - follow the broad markets (economies) and ignore the details
- Appreciate that large economies (US & China, not Nigeria) and their broad markets are too big to be manipulated quickly
- Understand how economies are like ships which take miles to turn off course so their direction can be detected in time to decide if you want to get off or not
- Understand what a market index is
- Learn how to take your profits early and cut your losses early by following broad market cycles, not greed or emotion
Know about Investment Costs & Tax Impact - all these eat away your earnings and over time are significant
- Understand how fees charged by financial companies impact your return
- Understand how investing may impact your taxes
- Understand the difference between a "retirement" and "investment" account and the tax consequences
Stay simple and use Index funds - they have lower fees and usually outperform actively managed funds
- Understand about no-load Index funds and their low cost
- Learn the difference between mutual funds and exchange traded funds
- Learn not to be tricked by salesmen into buying something you don't need
Understand investment risks and returns - Usually the greater the risk, the great the reward but not always
- Understand investment risks from inflation to fraud and all in between
- Learn how risk and return are measured
Investing for your retirement doesn't need to be complicated or time consuming. Be simple and be prepared.
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