5 Keys to Investing for Retirement

Hey, what's up everyone and welcome to the School of Personal Finance. In this week's video, we're going to talk about investing for our retirements. Unfortunately, pensions, they are few and far between these days. Social Security, it's a wild card. Hopefully, it'll be a part of all of our retirement plan. We're paying into it for all these years, so we've got to get something out of it, but we can't rely on that. So, investing for our own retirement, that's what it comes down to. We need to do this on our own. And the way that we're doing it is really through retirement accounts, right through tax-favored accounts. So, like 401Ks, 403Bs, 457 plans, IRAs, Roth IRAs. So, in this video, I want to walk you through my process, the blueprint, the five steps when I sit down with somebody and we try to figure out the best way for them to take advantage of these accounts and make sure that they are on the right path to saving enough money where they can actually retire one day and be somewhat comfortable in retirement and feel good about it. Most of us, those are the accounts that we're using. I mean, yes, we might be able to have our home paid off at that time and maybe we'll downsize or we'll do something different where we can cash out of our home and use some of that for retirement savings as well. But reality, our retirement accounts, that's going to be the heavy lifting. That's going to be the bulk of it. So, managing those, making sure you're taking advantage of it, that's what I want to talk about in this video. All right, let's get to it. All right, so a few quick things before we get started. Number one is I started on TikTok. So, if you're on that platform, come follow me. It's School of Personal Finance. Also, on Instagram, I'm richmccormick04. Come follow me over there as well. And then LinkedIn, I'm posting daily over there. I'm engaging with the community. So, come connect with me. Shoot me a message. Introduce yourself. I would love to connect with you on LinkedIn also. And over at my website, come download the free budget template. So, it's schoolofpersonalfinance.com. You enter your email address and I will send you my budget template. And then I also send out emails, typically once a week, just sharing my content and different personal finance topics. Come connect with me over there as well. So, the first thing that you have to look at and you have to consider, and it might sound very obvious, and that is your time horizon. All right, so if you are young, if you have 30 years to go for before you hit retirement, you have to realize that investing in these retirement accounts aggressively, it is a very smart way to go. History has proven that to us. The way that you get the best rate of returns is by investing aggressively over a very long period of time. In the short term, markets could do anything. But if you're not touching this money for like 30 years, if you're not even starting to touch it for 25, 30 years, and then you're going to be retired for another 30 years, you have a very long time horizon and you have to invest accordingly so that you can take advantage of the compounding, especially in the early years. But your time horizon, that is the driver of the bus, right? That really determines how you're going to invest in these types of accounts. But you have to be, you know, smart about it. You can't be in your 30s and your 40s and say, you know what, the markets are going down. I don't want to be in the markets. Let me pull out and go to cash. It's just very hard to time and it's not a smart thing to do. You want to make sure that you are invested the correct way for your time horizon. So that's a big part of it. So that's the first thing. All right, and then the second step is figuring out how much money we could actually save for our retirement. And, you know, Captain Obvious, the more you could save, the better off you are going to be. And this goes into our overall financial plan, right? Into tracking our monthly income versus our expenses, seeing what our cash flow looks like and making that commitment of how much money we want to put away for our retirement. And again, obviously the more you could save for retirement, then the earlier you could retire, right? The less money that you're able to live on every month, the more you could accumulate in these investment accounts, the better off you are going to be. And if you do decide that you want to retire early, then it'll put you in the position of strength if you're living on less of your income and saving more of it and building up that nest egg. So it's very important to know your numbers, to know your cash flow, to do the cash flow statement, your income versus expenses, and just be tight on that stuff. It's just part of an overall healthy financial plan and being great with your money. All right, and then the third thing is risk tolerance. So risk tolerance is a serious thing. And you have to really look in the mirror and come to terms with how you deal with risk, how you deal with market volatility. And a lot of times I learn it is just a lack of education through nobody's fault. It's just this stuff is just not taught and people don't realize it. When they see that they're losing money, it makes them very nervous. They might have a very low risk tolerance. Years ago when I started my career, I worked in the bank. And I saw many people who were in their 50s, their 60s, and they just never invested in the stock market because they just were brought up under the condition that it was just very risky and that you could lose your money and they'd rather be invested in CDs and in savings accounts. And back then CD rates were somewhat decent, but now that they're so low and that we're depending on this money for our retirement and we need growth, it's just not really an option anymore. So you have to really educate yourself about how the markets work and the market cycles and the ups and downs and try to get better with dealing with risk and having a higher risk tolerance. But risk tolerance, it plays a big part. You don't wanna be in a situation where you have this chunk of money in there and you start to hear on the news, we're going into a recession, inflation is high, all the doom and gloom that's coming out of every news outlet in the world these days and you panic and you move out and then you never really move back in. It's just very hard. So during these times, it is a good gut check. With the market down 20% or so year to date right now, it is a good gauge on your risk tolerance. If you're not worrying about it, if you're not thinking about it, if you're looking at it as an opportunity, just continue dollar cost averaging and adding to it, then I would say you have a pretty high risk tolerance. If you're losing sleep at night and you're worried about it, then you might have a lower risk tolerance and it's time to really sit back and think about these things. And the first question I always ask is, back to time horizon, when do you need this money? When are you gonna use this money? And if you say 20 years, then it's like I could show you a chart of any time in history. We could start any year and go out 20 years and I could show you the market performance and how it's always been positive over a 20 year period. And maybe that will increase your risk tolerance a little bit when you start to look at it that way. But you have to feel comfortable with it. So again, I think it starts with education, but you just don't wanna miss out by being super conservative and only wanting your money in FDIC insured, very safe types of investments where you just don't have the opportunity for growth. You might not end up anywhere near where you wanna be once retirement comes. So this could be a whole video in and of itself, talking about risk tolerance and all of that. But you just have to educate yourself and figure out where your comfort zone is. Not saying that you're super aggressive and then you have to be on this rollercoaster ride all the time. There's a happy medium somewhere in there and you have to find what that is for you. All right, and then the fourth step, and this is a meaty one, and I've done videos just on this step alone. And that's trying to decide what type of account is best for you to save for retirement. So you have all these different types of accounts that exist out there and figuring out which one might be the best for you, it depends on different circumstances. So like, for example, if you get a match in your 401k, it's pretty hard to argue against you at least taking advantage of the match. But we could take that a step further should you be investing in your traditional 401k or your Roth 401k. So these days, a majority of companies have introduced a Roth option into their employer-sponsored retirement accounts. So 401ks, 403bs, now most companies or most organizations you have a traditional 401k and a Roth 401k. So deciding on which is the best one for you, it comes down to your tax bracket, your time horizon, all the things that we've already kind of talked about a little bit, but you wanna make sure that you're investing in the right type of account. So just to use some examples, if you've committed through your financial plan and looking at your cashflow that you could save $5,000 for the year. And you're in the low income tax bracket, right? And also you have no employer match. In that situation, I can make the argument that all you need to do is a Roth IRA, that that might be the best way for you to save for retirement. And you don't have to do anything else up until this point, until you start being able to commit more to your retirement accounts. Because with a Roth IRA, you could go up to $6,000 in the year 2022. It really does depend on your situation. It depends on your tax bracket. That's a big driver when trying to figure out the right type of account. Other things that come into play is what does your 401k plan look like? If it's not good, if you have very high expense ratios for the investment options, if there's not a lot of different investment options available, then those are good reasons to not use the 401k or the 403b and instead use a Roth IRA or a traditional IRA if you qualify for that. So there's a lot of pieces to put this together and to come to the right decision. These are just a few of the examples. Like another example, if you make a lot of money and you're in a very high tax bracket and you get an employer match, then doing the traditional 401k and maxing that thing out, that probably makes a lot of sense, right? Because you could use the tax deduction right now because you're in the high tax bracket. And then you're going to get the full match on that as well. And if you're under the age of 50, you could do $20,500 into that for this year. But then another option, if you could save even more than that, you know, back to your cash flow, if you could commit more to that to retirement savings, then maybe you would do a backdoor Roth IRA contribution, which is a whole nother discussion. And I've done videos on those as well. So as you can see, there's a lot that goes into it, but choosing the right type of account, it can make all the difference in the world, especially when we're talking about fees and matches and deductions and all of those things. So you want to make sure that you have, you know, the right framework that you're choosing the right ways to save for your retirement. All right, so after you choose the type of account, the fifth step is to figure out what you're going to invest in inside of that account. And this could be very overwhelming. Like in a 401k or a 403b, you might have 30 options to choose from. You could have, you know, six different bond funds. You could have all these different types of stock funds and you might have no clue where to start. So let's start at the simplest place, right? And this is when you want to kind of set it and forget it. There are these types of funds that are called target date retirement funds, and they could be a great option. And you only have to choose that one fund. So basically what you do, the target date, it's going to have a date in the name of the fund. And that coincides with around when you think you're going to retire. So if you're going to retire around the year 2045, you choose a 2045 target date retirement fund. And you could be done and that could be it. And that could be a great set it and forget it way to go. And then under the hood of that fund, they're going to invest in different types of funds under the hood. So maybe they're going to have, you know, a couple of different stock index funds, some bond funds, maybe a little bit of cash in there as well. And as you get closer to the target date, the funds gets more conservative. They start putting more in the bond funds and less in the stock funds, and it starts to get a little bit more conservative over time. But you do want to understand what is under the hood of that. Like a lot of people make the assumption that once we hit that target date, that it's all in cash or it's all in very safe and secure options. And that's not how it works. You know, a lot of funds, when you hit the target date, it's still like in 65% stocks, right? So there's still a growth aspect to it and it can still go down in value if we have a big market correction. And that's okay, because you're not using all of the money, right when you hit that target date, when you retire, the money is still going to be invested for a long period of time. So those target date retirement funds, I'm a fan of them, but you just want to understand how they work because a lot of them are very different. And you also want to look at, and this is with all the funds, you want to look at the expense ratio. How much does it cost you to have your money in that fund? Some of them could be expensive. Like I was just looking at a Fidelity one and I think it was around 75 basis points, which means three quarters of 1% is the annual fee to have your money in there. So if you have a million dollars in your 401k in that one fund, you're paying $7,500 a year to Fidelity to manage that target date retirement fund. So you want to at least understand those expense ratios and how it impacts your actual account. So again, obviously the lower the expense ratio, the more money that you get to keep, the better you are, the lower the expense ratio. Now, if you would like to put together your own portfolio, or if you have somebody that's advising you how to put together your own portfolio inside of your retirement account, then what I suggest is you start by either thinking about, do I want actively managed funds or do I want what's called index funds? So actively managed funds means that there is a money manager who is actively buying and selling securities and trying to beat the market, trying to choose the right stocks or bonds to invest in that fund to outperform, to beat the market in there. And it's going to cost more in those actively managed funds because there's somebody sitting behind the wheel, you know, making decisions all the time. Where if you choose an index fund, like an S&P 500 index fund or a total stock market index fund, then the money is just going to follow that index. So like the S&P 500, it's the 500 biggest companies in the United States. You could turn on CNBC right now and see how the S&P 500 is doing. So if you choose that index fund, that again is more of like a set it and forget it because you just know you could turn on the TV and see how the market is doing. That's how your fund is doing. It's following the market. Much lower cost with those types of funds because nobody's really actively managing it. They're just following the index and there's many indexes you could choose from. So full disclosure, none of this is investment advice, but full disclosure, I'm a big fan of index funds. I love the idea of just investing in the total market, keeping my expenses very low and just participating in wherever the market goes. All right, everyone, that is it for this one. I wanted to keep it somewhat high level because we could really get into the weeds, especially with number four and number five there about the types of accounts and how to invest in those accounts. So maybe I'll make some more videos around that, but let me know in the comments down below how comfortable you feel about picking the allocation and investing for your retirement because it is super important right now that you take care of your own retirement so that one day you could go ahead and actually enjoy yourself and walk out the door and not look back and not have to go get another job or have to work until you're 80 years old or whatever the case may be. But hopefully you found it helpful. Hit that like button if you enjoyed it. Hit the subscribe button if you're not subscribed already and I'll see you in the next one. Thanks.