Investing for beginners: Step 4 of 12
Investing for beginners step 4. It sounds intriguing, but it can be overwhelming if you are new to investing. This post is STEP 4 of a twelve-part easy-to-understand series on investing to help get you started. So, even if you don’t know a merger from an ETF and your finances are a mess, you’ll find clear, concise instructions for making your money grow safely and responsibly.
If you missed steps 1 – 3, you can find them here: STEP 1, STEP 2, Step 3
Step 4: Invest 15% Into Retirement
Now that you understand the basic investing terms, your first actual investment will be one in your future. Experts recommend allocating 15% of your monthly income toward retirement.
Before you start exploring your options, though, you’ll need to set a goal or a target number. This number will represent how much you need to save to live comfortably and independently throughout your retirement. An excellent way to set a target number is to take your current living expenses and multiply that by 400. This number will give you the amount you’d need to sustain yourself based on a 4% investment return.
There are many investment options to consider for retirement. The most common are 401(k)s, IRAs, and Roth IRAs, each of which has their strengths and weaknesses.
Here’s what you’ll want to look for:
Matching Funds
This refers to matching monies offered by employers. Most will offer to match your contributions up to a specific limit. For example, your employer may offer a 100% match on the first 3% of your salary. If you earn $60,000, that means for the first $1,800 you have withheld from your paycheck and put into your retirement account, your employer will gift you an additional $1,800 in completely tax-free money. Even if all you do is a park that money in something stable like a trust fund, it’s the highest, safest, most immediate return you can earn anywhere in the stock market. Don’t leave free matching money on the table!
Tax-deferred Growth
If a retirement vehicle is tax-deferred, this means all the assets parked in that particular fund will not be taxed until they are withdrawn. This tax deference allows the money to grow untouched for years.
Tax-deductible
If a retirement fund is tax-deductible, every dollar you put into that fund is subtracted from your taxable income, automatically lowering your taxes. For those in their peak earning years, this can provide considerable tax savings.
In the table below, we offer a brief summary of the pros and cons of each retirement vehicle for easy comparison.
| Features/requirements | 401 (k) | IRA | Roth IRA |
| Matching Funds | Yes | No | No |
| Tax-deductible | Yes | Depends on income, tax-filing status, and other factors | No |
| Tax-deferred Growth | Yes | Yes | No |
| Taxable Withdrawals | Yes | Yes | No |
| Maximum Yearly Contribution (2017) | $18,000.00 | $5,500.00 | $5,500.00 |
| Maximum Yearly Contribution Age 50+ (2017) | $24,000.00 | $6,500.00 | $6,500.00 |
| Age Limit For Contributions | None | 70 1/2 | None |
| Income Eligibility (2017) | Any income earned through a company that offers a 401(k) | Earned income as reported on a W-2, wages from self-employment, tips, and alimony | Income with a gross worth of less than $118,000-$133,000/yr or $186,000-$196,000/yr for taxpayers filing jointly |
For a more current list, click here for the IRS investment comparison chart.
Once you have chosen your retirement fund, you’ll need to choose somewhere to invest the money. Low-risk investment vehicles, such as federal bonds or trust funds, are usually the best choice.
Target-Date Fund
If you are saving for retirement through the use of a 401(k), be sure to check if your employer offers a target-date fund.
The term “target date” refers to your planned retirement date. You’ll know your employer offers a target-date fund if there’s a calendar year in the fund’s name, such as A.J. Holdings Retirement 2050 Fund. Simply make an estimated guess of the year you’d like to retire, and then pick the fund with the date closest to your projected retirement.
A target-date fund is smart because it spreads the money in your 401(k) across many asset classes, such as large company stocks, small-company stocks, bonds, and emerging-markets stocks. Then, as you near the target date, the fund becomes more conservative, owning fewer stocks and more bonds, automatically reducing your risks as you near your retirement date.
This is it for investing for beginners step 4. To get the ball rolling on whichever retirement plan best suits your needs, you’ll need to speak to an H.R. representative at your workplace. With some work and planning, you’ll have your future secured in the best way possible.
