Retirement Funds: Start Making Your Money Work For You
Hopefully, you have saved some money in case of emergencies. It is always important to have some money set aside. If you are yet to do that, check on my previous posts. One shows the importance to save money. Two others explain simple changes and lifestyle changes to save more money. It is not wise to invest without any money that can immediately be obtained in emergencies. I recommend that investing is important when paying off debts, but still use most of your money to pay it off. I only invested $25-$50 into the stock market for every paycheck to pay off more of the student loan. However, it was more to keep up the habit of investing.
So what is investing? Investing is putting your money into something in which would provide you with a return of money. Investing can take many forms, which will be brought up in another post. In this one I will talk about one of, if not the first way to invest: your retirement fund.
The reason I recommend starting investing with your retirement fund is its ease. Investing is supposed to be a long-term goal. By investing in a retirement fund it forces that long-term mindset into new and upcoming investors.
You Must Plan Your Own Retirement
Is it necessary to plan for your own retierment? Here’s the problem, companies and the government are slowly rolling back pensions and social security respectively. There is still debate of the economic benefits for these roll backs as the return rates of private retirement accounts such as the Roth IRA have increased. Either way, it is very advisable that you will need to take charge of your own retirement.
“But why won’t anyone else take care of my retirement? Why not have the government take care of me.” The government takes money from you, and cannot keep track of your own funds. The government is like your least fiscally responsible family member. For some odd reason it does not seem like a good idea to let them take care of your future. Don’t rely on the government, rely on yourself, that is what independence is. And when you are financially independent, the government will rely on you, not the other way around. Just imagine that feeling and use that as motivation.
You Must Be Prepared For The Worst
Here is another reality about retirement. Life will get much more expensive. It’s like in the episode in The Golden Girls where the main cast saw the people who were homeless. One of the women said that your home costs money, doctors costs money, and medicine costs money. And while you can do much now, you may not be able to do all of that in the future. You may not even be able to mow your own lawn or fix your own house. You may have to pay for services you never thought you will have to.
To illustrate this point the Ellison Medical Foundation claims that as much as 1/8 of people over 65 have some form of dementia. However, an expert on neurodegenerative diseases at my school claimed those numbers could be higher.
My great grandfather died of Alzheimer’s recently. My grandfather, was diagnosed with Parkinson’s. It seems like neurodegenerative diseases may be more common than expected. This does not include injuries and many other diseases. Truth be told, just to live an ok life, you may need to retire a millionaire.
It’s Not As Scary As You May Think
I probably just scared you with the last paragraph, truth is I scared myself as I was writing it. Let’s talk about how to start a retirement fund. There are many ways to start a retirement fund. One is just by putting aside savings. I do not recommend this, remember inflation makes your wealth rust 3% annually. There are far better ways and many of them can build your wealth so well, they can all but guarantee you will retire a millionaire.
Don’t take only my word for it, there is a story of a parking lot attendant making $12/hr who has his house paid off and a portfolio which will ensure a comfortable retirement. And I am sure we are not the only people who will testify to this.
These funds are versatile and can accommodate almost any portfolio.
Wealth Building Retirement Funds
1) Roth IRA
This is my own retirement fund and I highly recommend it. A Roth IRA is a retirement fund in which you will not be taxed a single dime from any of your returns. You did not misread, by using a Roth IRA, the government cannot tax any single cent of your retirement fund as long as you follow the guidelines that you do not pull out any of your returns before 59.5 years of age (don’t ask me why this very specific age, I have no idea).
Is that too good to be true? Oh sure, why would the government try to encourage their citizens to take at least some charge in their own retirement funds? It’s not as if US government retirement funds are at risk.
2) Traditional IRA
Traditional IRAs are very similar to Roth IRAs. They can be taxed for their income from distributions and withdrawals, but the contributions are tax-deductible. The contributions are not tax deductible for a Roth IRA, but the income, growth, and withdrawals from distributions are NEVER TAXED. Your own income and background may affect which one will be best for you. I recommend talking to a financial expert before deciding which one to use.
A 401k is a good way to invest in your retirement, and in some cases may be better than even the tax avoiding funds mentioned above. 401ks are portfolios that are similar to Traditional IRAs, or when the option is provided, Roth IRAs. Unlike their Traditional IRA and Roth IRA counterparts, these plans are provided by employers.
The difference between a 401k and any version of an IRA are the benefits provided. These funds limit contributions (as expected with these benefits), automatic enrollment can be provided, and sometimes even less expensive funds are available. However, some 401ks will match the contributions of the employees. This means that whenever you contribute to your own 401k, the company will pay a fraction into it. This is free money. While 401ks are a dwindling option, if this is available, I very highly recommend starting one. Contribute as much as they will allow to maximize your income, as far as I am concerned a 401k is an improved IRA/Roth IRA when used properly. If you want to learn how to use a 401k properly check out this post.
What Should Your Retirement Portfolio Be?
Now what should your retirement portfolio be? There can be too much variation in just one investment, so people recommend diversification, which utilizes many different investments in many different sectors. Diversification is being debated over as to how that helps with overall returns. While there are other investments that could provide larger returns, they are also very risky. You do not want your retirement or livelihood to be entirely dependent on only a few investments. So I recommend diversification, at least for your retirement fund. Therefore, I recommend using a mutual fund primarily if not entirely in your retirement fund.
A mutual fund, is a group of stocks and bonds in which are meant to minimize loses of stock market. I may enrage many people by saying this, but I see more benefits and less stress using mutual funds for a retirement fund. Why? I usually forget about my fund until my paycheck comes up and I want to invest more money into it. When I do, I see frequent gains, far more than losses. This makes an mutual fund perfect for stress-less passive income.
Not all mutual funds are the same though. Some are actively managed, while some are passively managed. Passively managed funds are commonly called index funds, which follow a market index. Or at least they try to. According to the SPIVA 2017 report, most active stock managers were not able to beat the S&P 500 index.
Although there is no guarantee of a return, one of the only ways to loose money in it is by actively trading it, the others usually involve a major crisis. Actively trading a mutual fund completely nulls the point of diversification. They are designed to ride out the market. Getting angry about your loss from an mutual fund that was actively traded is like being enraged at your car for not turning into a submarine when it goes into the water. You are most likely to retire a millionaire by letting the investment ride and making regular contributions.
My Experience With Mutual Funds
Just to illustrate this point, I invested some money while I was in my early teens into a mutual fund. These did not grow much, but they never lost much either. I used them as low risk short-term investments for my car, apartment, and wedding, and instead switched my retirement to a different mutual fund. My retirement fund is not too much right now, but it will grow over time. In fact, if I do not invest a single penny for the rest of my life, my wife and I should still retire fairly comfortably. Of course, I will still invest more money into it. Like I said, for these funds to be worth a million dollars in the future you must invest regularly.
The key to taking full advantage of these investments is to start as young as possible. If I started investing right now it would be rather difficult to retire comfortably using reasonable regular payments from a PhD student stipend. Although, with any luck, my salary will be higher in the near future. Hopefully, I can invest more. Unfortunately, my education, like any other investment, does not guarantee any return so I cannot guarantee that.
Optimize Your Portfolio
Now, I am sure some of you are still not sure about taking these risks even knowing that the average rate of return is good in the stock market. So I will talk about how to minimize these risks. One of the best ways I see to optimize your stock portfolio is by dividends distributions.
Dividends are payments made for holding the shares in the fund to the shareholder. That’s right, dividends are money paid to the owner just for owning these stocks. Sometimes they are not as large as the growth in value of the stocks (in fact, hopefully not). They are still very good contributions to the stock portfolio especially during volatile times in the stock market.
To paint a picture, 2018 was a very volatile year in the stock market. A bear market occurred where stocks decreased in value by an average of 20%. By calculating the growth based off only my contributions I lost some money since the start of my fund. Now, by calculating the distributions in my fund (the reinvestments made from dividends), I still made money. From the start of the fund, it grew about 7% each year when averaged (note in 2018 it decreased around 20%). While this is still less than the average gains from the S&P 500, the distributions from the capital gains and dividends prevented any loss from occurring, even during a bear market.
Alternatively, when you have grown your fund enough, you can cash the dividends gains while keeping the same number of shares in the fund. Quite literally people can live off only the dividends of a fund without ever selling selling their shares in the stock market.
Where To Start Your Retirement Fund
If you feel like starting a mutual fund, I highly recommend using The Vanguard Group for your investments. Many companies charge fees for trading or have an expense ratio close to 1% of your investment returns. Vanguard prides itself by keeping the expense ratios low (an average of 0.11% ). This is a small difference that could save you a few thousand in your fund, not too much, but quite a bit. They also advise you in how to choose your fund very well. These funds require minimums though. $3,000 is common, but the Vanguard Star Fund requires only a minimum of $1,000.
I will not recommend any specific stocks, bonds, nor funds, this is your financial future, you should map it.
The Importance Of Starting Your Retirement Fund NOW
As mentioned, starting your investments while you are young is imperative. If you are in your teens, remember, the earlier the better. Twenties? You will make much more money starting now. Thirties or older? If you do not have a retirement fund, you should have a tab open to Vanguard or literally any other legit investment site while reading this. In fact, close this site and look into making a retirement fund right now, my blog isn’t going anywhere anytime soon.
Einstein once said that compound interest is “the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays for it.”
While your contributions may seem small and the growth too, they produce a snowball effect. Everything you add will receive compound interest. It can come to a point where the passive income will be more than sufficient to provide for yourself.
Investing in the stock market is crucial to become rich. Time shows that 84% of stocks are owned by the top 10% of Americans. Some people claim this is because the rich hoard money and buy stocks with it. So they believe people buy stocks to peacock. Have you ever seen a person at a club who wants to show off to their friends and waves out their shares of stocks? I didn’t think so. The cause-effect relationship is reversed. The top 10% are rich because they put their money in the stock market. You belong with that 10% so claim your shares, invest in yourself, and become rich in so many ways.
As I mentioned before I have not dedicated my life to understanding finances. My specialty is in biochemistry, which took almost a dozen of years and counting to develop since high school. Also at the time I wrote this I was 26. I do not believe I have spent quite as much time learning and specializing in finances as much as the people who dedicated as much time, if not more, in understanding money as I have in the molecules that create life.
In my next post I will write about a famous financial expert who spent more time learning about finances than I have lived. I recommend this man’s advice highly. It influenced my mentality to become a rich person, set to become a millionaire. Heed his advice and you will at least have the first steps to forge your wealth.