It's Time to Start Investing Today for your Future

I’m sure you’ve heard the advice plenty of times that you should be investing your money so that you have something for retirement.

Investing can be a daunting task, though.

Investing is complicated; it’s hard to envision how a few hundred invested today can grow to thousands over the years. We have a hard time understanding the value of things the farther in the future they are. And humans don’t think about compounding value naturally at all.

Because of these issues, many American’s are in a sad state when it comes to retirement savings. Many people retiring this year don’t have enough savings to cover it, and social security won’t cover the difference. Faced with his reality, many seniors are putting off retirement and working well into their 70s, or beyond.

Maybe you’re already ahead of the curve with your planning and have started putting money away. Or perhaps you’re part of the group that isn’t saving enough right now.

Either way, you could probably do a bit better than you are now to make sure you’re taken care of later.

Today, I’m going to cover the basic methods of investing, so that you can start down your path to financial security in your later years.

When you first get started, investing can be intimidating. There are lots of options out there, and everyone has their opinions and ‘tricks’ for working the system. That’s not what I’m going to talk about.

Instead, I’m going to cover a few of the simple, proven options for investing, and take away some of the mystery behind them so that you can find what a solution that works best for you.

First, before you invest, you should understand the concept of financial independence.

Financial independence, in a nutshell, is when you can afford to live off of the savings you have and the returns it generates. Meaning, you don’t need any sources of income to cover your expenses. Though, you could always have income to help as well.

To figure out how much you need in savings, start with how much you think you’ll be spending per year. Many experts say to expect it to be about 85% of what you currently spend, but it’s up to you decide what the amount will be.

Once you know your yearly needs, multiply it by 25, and that’s your target investment goal for retirement.

With 25 times your yearly spending in savings, that means each year you’re only spending 4% of your savings. And with an average growth of around 8% on those savings by investing, you’ll, in theory, never dip below a comfortable savings amount.

Some quick numbers as an example:

• If you believe you’ll spend $40,000 per year in retirement, you need $1,000,000 in savings.
• Every year, on average, that savings should generate around $80,000 in returns for you.
• Your spending needs are well below your returns generation, so withdrawing $40,000 each year keeps your savings stable.

If done right, you can have an excellent financial cushion, with leftover returns each year that will also continue to gain more value year after year.

Doesn’t having enough money to live freely, while you keep making more money, sound a lot better than working well into your senior years?

And the best part? Nothing is stopping you from hitting that point well before retirement either. Many people these days are interested in reaching financial independence so that they can live any life they want instead of working until retirement age.

Getting to a savings of at least a million dollars might seem impossible to you right now, but that’s the power of investing. If you started investing $1000 a month, with the historical average return of 8% you would have a savings of a million dollars in just over 25 years.

So let’s look at some of the options available to you for reaching your own financial independence and savings goals.

Many workplaces offer a 401k plan. With a 401k, you invest a percentage of your money from your paycheck directly into an investment fund.

Some of the pros for a 401k include:

• Employers will usually match a portion of your contribution — which is free money for you when you invest.
• Your money is contributed pre-tax, meaning your taxable income is lowered for the year, so you pay less in taxes today.
• 401ks usually only offer a few options of funds to put your money into, making them pretty hands-off for you to manage.

Some of the things to be aware of:

• When you withdraw your money at a later time, you pay tax on it as if it were income.
• If you withdraw any of the funds before retirement age (59 1/2), you will pay an extra tax on it.
• There are limits to how much you can invest in your 401k each year; for 2019, the limit is $19,000. Employer matches do not count against the limit.

An IRA is a retirement account that you manage yourself. These are good options if you don’t have a work 401k, choose not to use it, or have already maxed it out.

There are two major types of IRA — traditional and Roth. The most significant difference between the two is that with a traditional IRA, you pay income tax on your withdrawals, and with a Roth, you do not.

Some of the pros for IRAs include:

• They are personally managed, so you have more control over your investment portfolio. Though, most investment firms offer managed funds targeted to your retirement timeline.
• You can have both a traditional and a Roth IRA; allowing you to balance your investments around future taxation expectations.

Some of the things to be aware of:

• Roth IRAs limit your contribution allowance based on your taxable income for the year. If you earn more than a certain income amount in a year, you can not contribute to it.
• If you withdraw any of the money from an IRA before retirement age (59 1/2), you will pay an extra tax on it.
• There are limits to how much you can invest in your IRAs each year. For 2019, the limit is $6,000 across all IRA accounts for those under 50, $7000 for those over.

ETFs are a relatively new type of form of investment, which are collections of securities (stocks and bonds) that are managed by professionals. Unlike 401ks or IRAs though, they are not part of a retirement program; and your investment in them is self-managed.

Some of the pros for ETFs include:

• There are no contribution or income limits on your ETF investments.
• You have a lot more options for fund types in which to invest, allowing you to build a portfolio that fits your investment strategies. There are a wide range of ETF funds out there, both high and low risk.
• There are no extra taxes for selling an ETF before retirement; you are taxed on gains regardless of your age.

Some of the things to be aware of:

• ETFs can carry more risk than retirement funds. Because ETFs are collections of other stocks and bonds, their value can fluctuate drastically in response to many factors.
• Unlike retirement funds where you can typically invest any dollar amount, ETFs are purchased as complete units at the current value. Depending on the fund and unit price, this can make it harder to invest small amounts at a time.

Lastly, you can always invest in individual stocks. This method is the classic view most people have of investing, where you buy stock from a specific company.

Some of the pros for individual stocks include:

• You have complete control over exactly what you invest in since you’re buying a specific stock instead of a fund.
• If you invest in the right stock early enough, you can get incredible value out of it. You’ve probably heard some of these stories about early Apple or Google investors.

Some of the things to be aware of:

• Investing in individual stocks can be incredibly risky; you’re gambling on the performance of a specific company. For every Apple or Google story, there’s a story of another company losing major value. This just recently happened to Netflix with their last quarter.

Investing always carries a risk; there are no tricks. But that doesn’t mean it needs to be intimidating.

Before you invest, make sure you do your research and understand what you’re getting into and find the options that work best for you.

Know if you or someone else will be responsible for managing the funds. Understand what kinds of fees or taxes to expect for withdrawing your money down the line. Figure out your comfort level with potential losses, and how much risk you want to take on.

But above all else, start investing today for your future.