It may seem far in the future, but you should start thinking about retirement from the first day of your first job – and by “job” I mean the money you’ve earned at any point in your life.
From the time you start babysitting or mowing lawns to the orientation of your first adult job, you have to make decisions about how much to save and how to grow your money for that distant date when you stop working. extra time.
MarketWatch recently spoke with a group of college students for Barron’s Investing in Education program about how to start saving for retirement, and they wanted to know about everything from investment mechanics to macroeconomic forces like inflation that will affect their long-term savings.
Here are the answers to the main questions they ask.
If you want to start your own savings investment account, where would you like to start? Which funds and indexes do you like with low expenses?
Once you start making money, there is a hierarchy that makes it easy to prioritize some of it to save for later, and you should continue to look ahead as much as possible.
If you have access to a 401(k) at work, contribute up to your 401(k) match—it’s free money, so start there before opening a savings or investment account.
Put money aside in an interest-bearing savings account for emergencies. Get the highest rate available in the market and transfer your money if a better deal is available.
Contribute to a Roth IRA—You can deposit up to $6,500 in earned income in 2023. You can do this even if you have a few side gigs or summer jobs, and even if you’re under 18 (with parental help). ).
Open an investment account and start as broadly as possible, with a simple index fund, and then delve deeper as you learn how to invest yourself (hopefully from sources other than social media).
What should be the expected annual income?
Your guess is as good as anyone’s on this question. Past performance is not an indicator of future performance – this is something you’ll hear a lot when it comes to investing. The last three years have been volatile and most expectations have been turned on their heads. You can track the S&P 500 SPX index,
as a representative of how things go each day, but it still doesn’t tell you what tomorrow will bring.
What has been true in the past is that stocks generally rise over time, and if you invest when you’re young, you have a good chance of outpacing inflation. When you calculate the numbers for 40 or 50 years using a retirement calculator, you want the probability of success, so you can use a number like a 7% annual average return and play with it from there.
But if you want a sure thing now, you can get about 4% for now in a high-yield savings account with CDs and short-term Treasurys TMUBMUSD10Y, up to 6.89% for Series I bonds.
What is the division of stocks and bonds?
There are all sorts of rules of thumb for how to divide your investments based on factors like your age and total income. You can choose a random one – say 100 minus your age to determine your equity percentage – or you can be a little more scientific about it and ask for an appropriate risk tolerance. Regardless of the financial institution you choose to invest in, there should be a proprietary version of one, but you can also find free ones.
What area of a stock do you monitor most to determine if it is a good investment?
Textbooks will tell you to value a stock by looking at a number of mathematical ratios, such as price-to-earnings or dividend yield, but before you look at this number: the expense ratio. Since most brokers no longer charge fees for trading, this is the price you will pay to own the investment. Any fees you pay eat into your earnings, so you want to choose investments that provide a good return on cost of ownership. Exchange-traded funds, which are professionally managed baskets of stocks, are usually a good choice for this reason.
What is the penalty if I want to use my 401(k) money before I retire?
If you withdraw money from a tax-deferred retirement account before age 59 ½, you’ll owe income tax on the amount you withdraw plus a 10% penalty, unless you qualify for the special hardship exemption (which is unlikely).
A cheaper way to access the funds is to take out a 401(k) loan if your plan allows it (and most do). You can withdraw 50% of your credited balance or up to $50,000, whichever is less. Technically, you are borrowing money from yourself and paying it back with interest. It’s not free though. Your administrator will probably charge a $50 annual fee, plus you’ll lose the growth you would have earned if the money were still in the account. Also, most people stop contributing when they pay off the loan, so you lose it. The big risk is that if you quit before the loan is repaid, you’ll have to pay it back immediately or face income tax and a 10% penalty.
These strict rules exist for a good reason: the money you’ve saved for retirement should be there for you when you stop working. Once you start investing, the last thing you want is to get derailed along the way, so keep going.
Do you have questions about the mechanics of investing, how it fits into your overall financial plan, and what strategies can help you get the most out of your money? You can email me at [email protected].