I recently came across a post at the finance forum Bogleheads regarding investing for retirement. There are a countless number of strategies out there, but most of them don’t help the average person easily invest for retirement. Although good in their intent, trying to explain to someone not familiar with the world of finance how to best allocate their retirement funds, annually rebalance their portfolio, or optimize their foreign currency diversification is not effective. I’ve decided to simplify the discussion for most people so that anyone can easily prepare for retirement without making investing their job or only hobby.
What Percent to Save Towards Retirement
Even though saving for retirement won’t guarantee a life of luxury and no one knows exactly what stocks will do, investing for retirement is a wise decision that you should do to best prepare for the future. Since you don’t want to oversave and forget about today, I, and others I have spoken to, recommend that saving 10% for retirement is a healthy place to start.
The 10% plays out like this for someone making $50K.
- Starting this year, $5K after taxes is invested in something like a Roth IRA
- As salary hopefully increases with inflation (or more), the $5K increases by 2.5% every year – $5,125 is invested in year two assuming the salary is $51,250
- After 30 years and assuming 2.5% inflation and 7.5% stock returns, you will be able to spend the equivalent of $18.6K of today’s money each year for 40 more years
- Or, after 40 years, you will be able to spend $37.6 of today’s money for 30 more years
Now, I used 30 and 40 years as examples for a 35 and 25 year-old respectively trying to save until age 65 and then using the money until age 95. In the case of the 25 year-old, $37K in today’s money is pretty good considering it’s tax free. Also, hopefully he would have less expenses with a paid off house and also some other potential sources of income. The 35 year-old isn’t sitting quite as pretty but can probably get by. With some other sources of income he may be ok. In the end, 10% is a good minimum.
What Funds to Invest In for Retirement
As for where to invest the money, I highly recommend Target Retirement Funds. You will likely read both positive and negative reviews on the funds, but here is why I like them and why you should invest in them if you’re not a full time investor or if investing is not your number one hobby.
Target Retirement Funds
- Are simple and easy to set up
- Don’t need rebalancing – just put the money in with each paycheck and don’t touch it until you retire
- Invest in stocks and bonds, the U.S. and abroad, and in Growth and Value companies
- Have low fees at T. Rowe Price and Vanguard
Since they follow the diversification most experts recommend and require very little effort, they are a no-brainer for most young adults who aren’t sure where to start. Funds are named based on the year you may retire. To find the right fund for you, subtract your age from 65, add that to the current year, and round to the nearest 5/10 (if you are 26 then 65-26=39 -> 39+2010=2049 -> 2050).
Retirement Investing Links
Below are some links to get started. Start today and you’ll be thanking yourself for the wise choice years from now.
- Vanguard Retirement Funds (lowest fees and slightly higher minimums to start)
- T. Rowe Price Retirement Funds (low fees and low minimums to start)
Let me know if you have any further questions or thoughts.
Additionally, I was first inspired to invest in Target Retirement Funds after reading this blog:
My Money Blog