If you’re under 40, committing to the habit of investing a percentage of your income—even a little bit—is the most important financial move you can make for your future self.
Yes, you undoubtedly have more immediate goals than saving for retirement. But someday, many years from now, you will no longer want to get up and go to work every morning. And unless you want to spend old age in poverty, you’re going to need a good-size nest egg.
On Money Under 30, we recently hypothesized that a 30-year-old today will need $2 million to retire—accounting for inflation, that would have the same purchasing power as about $750,000 of today’s dollars. Along with Social Security, that should be enough to maintain a modest but comfortable lifestyle, however long you live (hopefully a long time). Advancements in healthcare and longer life expectancy are just two reasons we need to save even more for retirement than our parents.
The good news? Time is on your side. You’ve likely seen graphs illustrating how much investments can compound over several decades. If you’re lucky enough to earn an average annual return of between 7 and 8 percent, your investments will roughly double every 10 years. So if you start with $10,000, after 10 years you will have about $20,000; after 20 years, $40,000; after 30 years, $80,000; and after 40 years, your single $10,000 investment could be worth over $180,000. This calculator will let you test your own scenarios.
Yes, investing is intimidating. And, at times, scary: The stock market goes up and down, and nobody wants to lose money. But when you’re young, that doesn't matter as much. You can have a bad year. Or several. All that matters is that you’re in the game and you stay in the game. Because, in the long run, your money will grow.
SO, HOW DO YOU GET STARTED INVESTING?
It shouldn’t take more than 15 minutes. Seriously. All you need is an Internet connection and your bank account’s routing number and account number. Here's what to do.
1. DECIDE WHY YOU'RE INVESTING AND FOR HOW LONG.
To keep this easy, let’s assume you’re investing for retirement and have at least 20 years before you expect to retire. Let’s also assume you don’t plan to retire before age 60.
In this case, I recommend that you begin with an account called a Roth IRA. You can open a Roth IRA at virtually any bank or financial services company.
A Roth IRA is a kind of retirement account that gets favorable tax treatment. After age 59-and-a-half, you can withdraw money (both principal and earnings) from a Roth IRA tax free. That’s a powerful benefit because it gives you tax-free income in retirement. Because the tax treatment of Roth IRAs is so favorable, there are limits:
In 2016, individuals can contribute a maximum of $5500 to an IRA. If you’re 50 or older, you can make an additional $1000 “catch-up” contribution.
In 2016, if you’re single and earn more than $132,000 or you’re married (filing jointly) and earn more than $194,000, you’re ineligible for a Roth IRA. Individuals with high incomes below these limits may be subject to reduced maximum contributions. You can read more about Roth IRA limitations here.
2. DECIDE HOW YOU WANT TO INVEST.
You should think of a Roth IRA as an empty bucket that you will fill with investments. You could put almost any kind of investment into your Roth IRA bucket—cash in the form of certificates of deposit (CDs), stocks, mutual funds, government bonds, or even gold and silver.
Unless you’re already a knowledgeable investor, I recommend investing in index funds. Index funds track certain parts of a particular stock or bond market (or the entire market). Index funds are great because they:
Provide immediate diversification.
Cost less than actively managed mutual funds or trade commissions on individual securities.
Perform as well as (or better than) more expensive actively managed mutual funds.
If you want to try another investing strategy besides index funds, be wary of two things:
Do not invest for retirement in cash (savings accounts or CDs). Your earnings won’t beat inflation, so your real rate of return will be negative over the long run.
Avoid financial advisors who aggressively sell specific mutual funds, annuities, or cash value life insurance policies. These investments are expensive and inappropriate for most investors.
3. DECIDE WHERE YOU WILL INVEST.
Deciding where to open a Roth IRA and invest your money is another intimidating decision. There are hundreds of options, but let’s narrow the field.
Vanguard is the world’s largest mutual fund company and pioneered low-cost index investing. Investing directly with Vanguard may be the lowest-cost way to go, but Vanguard does have minimum investment requirements. Also, you will need to choose the funds in which you invest, which requires some additional knowledge. Want plug-and-play investing? Read on.
New companies like Betterment, Wealthfront, and Acorns allow you to invest in low-cost, broadly-diversified portfolios. These firms, colloquially called “robo-advisors,” offer portfolios containing many of the same funds you’ll see at Vanguard. The robo-advisors add value by doing the work of choosing funds and maintaining the right balance of funds in your account.
When you open an account at one of these companies, you’ll answer a few simple questions and they will invest your money in the best portfolio for your goals. And that’s it; you’re done. You can make a lump-sum investment or sign up for recurring monthly deposits. Acorns even offers a feature that allows you to round-up purchases on your credit or debit card and invest the “spare change” every week.
Betterment, Wealthfront, and Acorns work similarly, but have different pricing models. As of February 2016:
Wealthfront is free for accounts under $10,000 but requires a $500 minimum investment.
Betterment has no minimum to open an account, but you must set up an auto-deposit of at least $100 per month to avoid a $3 per month fee.
Acorns has no minimum investment but accounts under $5000 are charged a $1 per month fee; students can invest for free. Invest as little as $5 each month.
Otherwise, all accounts charge annual investment fees that are based on a percentage (between 0.15 and 0.25 percent) of your account balance. Betterment becomes slightly less expensive than the others if you have more than $100,000 invested.
4. FUND YOUR ACCOUNT.
Once you choose an investment account in which to open your Roth IRA, the last step is to fund your account. Simply follow the instructions to link your bank account and decide how much to invest.
The robo-advisors mentioned above make it easy to set up regular monthly deposits, so you can get started with as little as $50 or $100 a month.
Even if you know nothing about investing, you can get started today in as little as 15 minutes:
1. Find out if you qualify for a Roth IRA. You qualify in 2016 if you’re single and earn less than $117,000 or if you’re married, filing your taxes jointly, and together earn less than $194,000.
2. Decide where to open an account. Vanguard gives you direct access to low-cost index funds but requires you to select your investments and manage your own portfolio. Robo-advisors—including Betterment, Wealthfront, and Acorns—offer plug-and-play portfolios based on your answers to a few simple questions.
3. Link your bank and fund your account. Enter your checking account’s routing and account numbers and transfer an initial investment. If possible, set up a monthly auto-deposit up to a maximum of $5500 a year. Want to invest more? Open a second account (that one won’t get the tax benefits like the Roth IRA, unfortunately) or inquire with your employer about employer-sponsored retirement accounts at work (see how to get started with a 401(k) here).
When it comes to investing before retirement, the important thing is to get off the sidelines. Ignore doom-and-gloom news about short-term market routes, “hot stock tips” from your Uncle Ned, and dodgy investments peddled by commission-only financial advisors. Do these things, and you can sleep well knowing one day you will retire richer than most.
For more down-to-earth financial insights, check out these stories from Money Under 30: