Investing for retirement doesn’t need to be complicated.
Anyone who tells you otherwise is probably trying to sell you something.
In this article, I’ll give you five simple steps to open a retirement account. It should take less than 30 minutes, and once you set it up, you likely won’t need to touch it until you retire.
Most importantly, your money will be working for you. Eventually, the income from your investments will exceed your expenses. When you reach this point, you’ll no longer need to trade time for money. You’ll be financially independent, and will have the freedom to do whatever you want with your life.
The Simplest Way To Invest
The simplest, most accessible way to invest is via the stock market. If you invest regularly, barring a zombie apocalypse, you’ll become wealthy over time.
I say this because the stock market has trended upwards for over 100 years. Even though it goes through rough patches of volatility, it goes up over time. This means if you can withstand the ups and downs, your money can grow dramatically.
To illustrate how powerful the stock market can be, let’s say you deposit $200 each month into an IRA. You do this for the next 40 years. Here’s a chart that displays your hypothetical returns based on how well your investment performs.
So, if you put $200 per month into an account for the next 40 years, you would have invested $96,000 of your money. In return, you could generate substantial wealth.
Here’s five simple steps to get you started.
5 Steps To Opening Your Investment Account
1.) Open an investment account with Vanguard.
There are plenty of options, but I recommend Vanguard. They have the lowest fees, and best reputation. There are 3 main types of accounts you can choose from.
This is the most flexible account type, because you can take your money out of the account at any time (try not to do this, though). Also, there is no limit on the amount you can contribute each year (unlike IRA’s and 401k’s). The downside is, any interest you earn will be taxed by the government. This means less of your money is working for you, and will result in lower returns over time.
Summary: Most flexible. Worst option for long term gains.
This is a “tax-advantaged” account. This means your gains won’t be taxed each year, and as a result, you will end up with more money in the long run. There is a caveat to this – it’s difficult (but not impossible) to withdraw money from a traditional IRA until you’re 59.5. When tax time rolls around, you will deduct any contributions you made to your IRA from your taxable income. This saves you money on your taxes today, however you’ll pay taxes on the money when you withdraw it in the future. As of 2016, you can contribute up to $5,500 per year, if you’re under the age of 50.
Summary: Least flexible. Best option for long term gains.
This is also a “tax-advantaged” account, but is different from a traditional IRA. It’s slightly more flexible, because you can withdraw money that you’ve contributed at any time (but you can’t touch your gains till you’re 59.5). With a Roth IRA, you contribute money after it has been taxed, so you will not deduct your contributions from your tax bill. This means you won’t have to pay taxes on the money when you withdraw it in the future.
Summary: More flexible than traditional IRA, but less effective for long term gains.
If you plan on not touching your money until you retire, I recommend a traditional IRA, because it will amass more money than a Roth IRA, or taxable account. If you want ultimate flexibility, and can stomach lower returns, a taxable account is the way to go.
Your situation will determine which account type is best for you, and there’s nothing stopping you from contributing to all 3 types of accounts (which is what I do). There’s mountains of information online about the different account types, and you can always call vanguard if you have any questions.
2.) Choose a diversified fund that fits your needs.
Now that you have an account set up, you’ll need to find some investments to fund the account. You can think of your account as a house, and your investments as rooms within the house.
I personally prefer the Vanguard Target Date funds, because they automatically readjust your stock and bond holdings to match what phase of life you’re in. This means it’s a “set it and forget it” fund that you could theoretically own for life. This will give you exposure to the domestic and foreign stock and bond markets, while keeping fees extremely low. (There is a $1000 minimum deposit in this fund, so save money in a savings account until you have enough to open an account.)
Alternatively, for a super minimalist approach, you could simply invest in an S&P 500 index fund, or total stock market index fund, (although I prefer including some foreign holdings in my portfolio).
3.) Deposit your initial savings.
This will take care of the account minimum.
4.) Set up recurring deposits.
This will automatically deposit money into your account on a weekly or monthly basis, and is a great way to “force” yourself to save.
5.) Sit back and enjoy life.
Ignore the ups and downs of the stock market and rest assured that your money is growing; working for you 5 days a week. Eventually, you’ll hit the tipping point and your investments will earn you a full-time income.
By simply saving and investing each month, you’ll be well on your way.
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