Ok, so maybe this headline is a bit… strange or extreme, but it got your attention, didn’t it? I joke about this topic with clients all of the time and try to keep it loose so that they can see the bigger picture. What am I talking about? Saving for retirement, of course (Baby Step #4). Having a good plan can make the difference between just getting by (IE Eating dog food), and living the life you really want to live in retirement.
I’m going to try and avoid being dramatic here as much as I can, but make no mistake about it. This is important! For most Americans, especially those in my age bracket and below, Social Security is probably not going to be enough. Age 50 or older? You have a much better chance, although you should STILL be saving 15% of your income no matter how old you are.
The way I look at it is this: If Social Security IS there, it’s basically a bonus. In other words, my philosophy is to prepare for retirement as if Social Security didn’t exist, whatsoever.
How do we do this? EASY! Baby Step #4 is here to help us out
So why 15%? To put it simply, it’s what all the experts say we’ll need. Google it. Trust me, there are enough people who say 15% is the number, that you don’t need me to explain why.
What I want to focus on here is the math. As of 2015, the average salary across all jobs in the U.S. was $51,939 per year, so I’m going to use that number as our example. SO! If you start at age 30 and work until age 65 here is what your retirement account will look like if you never get a raise again, which is obviously super unlikely). This also doesn’t account for any money that you had saved up for retirement before age 30.
- Income: $51,939 per year
- Amount put away per year: $7,790.85
- Amount put away per month: $649.24
- After 35 years, at 8% interest you will have $1,489,257.33
A lot of money, right? Absolutely. Now, you might be asking why I used 8% as the interest rate that you’ll receive on your investment. Well, the S&P 500, which tracks the value of the 500 largest companies in the U.S., has returned roughly 10% on average since 1928. Most Americans shy away from portfolios that are 100% invested in stocks. I do not. So if you use my example and expect 10%, you could have $2,464,929.29. Almost $1,000,000 more. Let that sink in. For a small amount of additional risk, you could have nearly $1,000,000 more in your retirement accounts. To me, that’s worth it.
So what should I invest in?
My recommendation is generally the same for everyone (Although some folks frown on that). I break my investments up into equal chunks (25% each) of four different categories. All good growth stock mutual funds. No single stocks. Buying mutual funds (Or ETFs in some cases) across these four categories, allows for proper diversification.
So what are they?
- Large Cap
- Mid Cap
- Small Cap
- International (Make sure you find funds that are TRULY international. Some tend to have a large percentage of US stocks in them. You want one with at least 90% foreign stocks)
Again, having equal weight in each category allows you to take advantage of the booms in each one when they happen while others might not be doing so well. If you invest this way, your portfolio will have thousands of companies in it instead of just a handful, and there won’t be much overlap. Being truly diverse is a huge key to success when it comes to investing.
I hope that you’ve come to understand the value of investing properly into retirement and how diversification plays a BIG role in reaching your goals. A good strategy can make all the difference, and what is even more important is that you work with an investment professional that you trust. Whether it’s me or someone else, make sure that they’re educating you so that you fully understand what you’re investing in, and why. Comfort, knowledge, and having a good advisor to hold your hand through the bad times can make the ups and downs of the market much easier to stomach, and make you much less likely to make mistakes along the way.
Tomorrow, we’re going to cover Baby Step #5: Saving for college. I’ll see you all then!
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