Investing for retirement: a guide to getting started

Investing comes up all the time in my conversations with clients. Everybody feels like they should be investing in some form or fashion, but they don’t always know where or when to start. This guide is a road map for people who are very new at investing for retirement and want to build a solid foundation. 

Real talk: you are going to need to become at least a millionaire just to retire in basic dignity someday. It’s not a daydream, it’s a requirement. 

The average American retires at 64 (the official “full retirement age” per the government is 67). If you’ve made it to 64, you can statistically expect to live 18–20 more years! You’ll need a nest egg to sustain those golden years beyond the pittance offered by Social Security (which only replaces, on average, 40% of your pre-retirement income). If you’d like to keep living in the manner to which you’ve become accustomed, investing wisely can help you get there. 

How do I know when I’m ready to invest for retirement?

If you have no non-mortgage debt and at least 3 months of expenses in a designated emergency fund (e-fund for short, in a high yield savings account), you are ready to start. We talk about why you want to pay off your debts first here.

If you have at least 3 months of expenses saved in your e-fund, you should begin investing 5% of your household’s take-home pay in retirement savings. While you do this, keep building your emergency fund until you hit at least 6 months of saved expenses. 

If you have at least 6 months of expenses in your e-fund, you should invest 15% of your household’s take-home pay in retirement savings. (Don’t count employer contributions toward your 15%.) A 15% starting target leaves you with enough extra to put toward other big goals, like saving for kids’ college or paying off your home, which will create more room for additional saving later. And 15% is a solid start to build on if you decide you want to do more sooner. 

These recommendations are one-size-fits-most and are based on a “typical” retirement age of 67. If you are debt-free, have an emergency fund, and would like a bit more fidelity around your individual numbers, a simple retirement calculator like NerdWallet’s or Vanguard’s may be helpful—especially if you’re interested in retiring earlier than the standard age (I know I am!). 

Everyone’s situation is a little different, and that’s why I’m here. As a financial coach, I can help you tailor a plan from one-size-fits-most to something that works for your life and your dreams. If you would like help figuring out exactly how to rock your retirement saving strategy, book yourself a complimentary Big Financial Picture session

What kind of retirement accounts should I use? And when should I use them?

Depending on what you qualify for, here’s the recommended order for tax-favored accounts: 

  1. Contribute as much as you need to take advantage of an employer matching contribution in an employer-sponsored plan (e.g., 401(k), 403(b), Thrift Savings Plan, SEP/Simple IRA). 
    • You don’t qualify for this step if… your employer doesn’t offer a match. 
  2. Contribute as much as you can to a Roth/Traditional IRA, up to $6,000 total per person per year (or your household’s total earned income, whichever is less). If you are a non-income spouse, you can contribute using your spouse’s earned income if you are married filing jointly. 
    • You may not qualify for a Traditional IRA if… you (or you + your spouse) have no earned income that year. Most people can contribute to a Traditional IRA, but there are exceptions.
      A 25-year-old grad student living at home with their parents isn’t part of the “filing household” since they can’t be claimed as a dependent. If that grad student is earning all their income from unreported under-the-table babysitting, they wouldn’t be able to contribute to an IRA. 
    • You may not qualify for a Roth IRA if… you (or you + your spouse) have too little earned income, or if your income is too high. The limit starts at a modified AGI of $129,000 (single filer) and $204,000 (married filing jointly).
      Modified AGI is a bit confusing and requires diving into your tax return, but it’s usually close to your AGI for most people. If your regular AGI from your tax return isn’t over those thresholds, then you should be ok. If it is, you can use this IRS worksheet or consult with a tax professional to figure out whether you’re over the line.    
  3. Contribute the rest of your 15% in your employer-sponsored or other tax-favored plan. 

If you still have some of your 15% left after you’ve done all you can in tax-favored accounts, you can then move on to non-retirement brokerage accounts, real estate, and other investment types. But start with the tax-favored stuff because you want to catch those tax breaks where you can!

What are “low risk” versus “high risk” investments? Should I be “aggressive” or “conservative”?

If you tell an investment professional you are “risk averse,” they will almost definitely recommend a higher percentage of bonds in your portfolio because the conventional advice says that bonds are less “risky” than stocks—they are “low risk, low reward” investments. But unless you are within a few years of normal retirement age, we are talking about money that will sit in the dark and grow quietly for a LONG time. If you are protected against risk in other areas of your life, the calculus changes. 

We want the long-term “high rewards” of compound interest from so-called “aggressive” investing, which is considered “high risk.” The “risk” from long-term investing in well-diversified index funds doesn’t scare us because we’re protected against short-term risks. We have a fully funded e-fund in a high-yield savings account to cover short-term needs, we have adequate term life insurance coverage, we don’t put anything in investments that we might need within five years, and we don’t plan to touch our retirement accounts for decades.

So… we don’t invest in bonds. (If you want to know what we actually think is risky, keep reading!)

Do I need to hire an investment professional? 

Good investing is not about market timing or picking stocks; it’s about patiently, steadily investing in extremely practical funds that bet on the long-term health of the market, not on the health of an individual company. It’s boring and straightforward, and you don’t need an investment professional to help you execute this simple, effective strategy. 

If you really want professional help, find somebody who is willing to explain stuff to you like you’re six, not someone who is going to try and coax you into stuff that isn’t in your best interest by using fancy financial jargon or scare tactics. 

One caveat: if you are an extremely emotional investor who is prone to toxic “buy high, sell low” behaviors (or if you’re married to someone who is), it may be worth the cost to hire a trustworthy professional that can protect your household from your worst instincts until you get those unhealthy knee-jerk reactions sorted out.

How should I pick investments if I’m doing it myself?

The single biggest factor in having enough money to retire, for most people, is not where you put your money but whether you put money away.  Financial advisors make a lot of money convincing you that investing is all very complicated and you need their help to muddle through it. The unglamorous truth is that steady, boring, basic investing in a few strong index funds will mathematically set you up well for retirement. 

I am not an investment professional and am not legally allowed to give investment advice, but I am allowed to tell you what we do. We choose index and mutual funds with long track records of strong performance and very low fees (also called “expense ratios” or “loads”). Index funds are portfolios of stocks based on a specified chunk of the financial market—and they are basically auto-diversified. 

We do not like actively managed funds because most reports show that actively managed funds tend to underperform index funds. Passively managed index funds also tend to have much lower fees. 

When I am shopping for funds, I look at funds that have been open for at least 10 years. Of those, I look at the ones with the highest returns (at least 8%, preferably over 12%, over the life of the fund) and low fees (under 1%, but preferably much lower). 

Here is what that looked like in practice when I looked at index funds recently with Fidelity’s research tool, which is available to the public. (We currently have our accounts there and it’s been a good experience; not sponsored, just sharing what we use!)

We assess fund options in line with Dave Ramsey’s basic strategy for picking mutual funds. He recommends 25% each in small-cap, mid-cap, large-cap, and international mutual funds because different market forces affect different market segments. The same crisis that strains big U.S. companies might not be so dire for small or international businesses. 
If one of each fund type meets our requirements in a given retirement account, then we may wind up with that 25% x 4 approach. But sometimes the relevant account just doesn’t have perfect options for each category (funds are too new, returns are too low, or fees are too high), so we go lighter in a given category and balance our portfolio elsewhere.   

However, if you don’t want to fuss with any of this yet, a perfectly fine option is to pick just one Target Retirement Date fund with good returns and the furthest-out retirement date you can get (well past the year you actually want to retire!). I know it sounds weird, but we recommend picking a later date because the mix of stocks and bonds in those funds begins “aggressive” and automatically shifts to a more “conservative” (i.e., bond-heavy) mix as you approach the stated retirement date. We want high-performing investments for as long as possible to capture the high rewards of compound interest. Target date funds are typically internally well-diversified and have low fees, and many employer plans have them as an option. They’re a good choice!

tl;dr: It’s much better to start investing in a smart, simple way than to get overwhelmed by your options and not start at all.  

Are there any investment strategies I should avoid like the plague? 

  • We do not buy cryptocurrency or NFTs (non-fungible tokens). The press around the blockchain/Web3 makes it sound like you need to get smart and get in there, even though most of us have knowledge about three articles deep. These “investments” are too risky for us to bother touching.
  • We don’t try to time the market. We are buy-and-hold investors who invest steadily in our chosen mature low-fee index and mutual funds every month. (Though, if we have extra money lying around in a given month, we might go bigger if the market is down—as Mr. Fortuna likes to say, “stocks are on sale!”) We don’t get emotionally involved in our investment account balance. We don’t plan to withdraw our retirement funds until retirement. For that matter, we don’t invest money in non-retirement brokerage accounts if we think we might need it within five years. When you’re talking about the whole market—which is how we’re investing, since we’re all about those index funds—you have to remember: down days/weeks/months/years happen and down decades almost never do. From 1927-2018, 94% of 10-year periods have been positive for the S&P 500. Try to stop worrying and love the market.   
  • We don’t mess around with single stocks. Recently I was chatting with a friend who thought their buddy should hang on to a single stock instead of liquidating it to pay down debt. In this case, the single stock was Berkshire Hathaway. 
    Me: I don’t like single stocks. I say he kills it and gets rid of the debt. 
    Friend: Well, Berkshire Hathaway isn’t really a single stock… but maybe he should sell; I am kind of worried that Warren Buffett might kick the bucket soon. 
    Me: … and that’s why I don’t like single stocks. “One guy dies and the company might flail” is not a part of my long-term investment strategy. 

    If you were betting on football, would you bet on the health and success of a single player? Or would you feel safer betting on a whole team, or—even better—on the ongoing success of the whole sports league? If you think it’s super fun to invest in single companies, treat it with the same attitude that you would treat gambling in Vegas—as a way to have fun but not as a serious retirement plan. If you get super lucky? Awesome!  If not, you didn’t lose anything that would stress you out. 
  • Finally, we don’t do early withdrawals or loans against retirement accounts. That’s not really investing—in fact, it’s the opposite—and we don’t recommend it except as a last resort (e.g., to avoid bankruptcy/foreclosure). 

Ok, but what if I forget most of this tomorrow? What do I really need to remember about investing for retirement?

It’s ok, my fellow goldfish. I got you. 

  • After you’re out of non-mortgage debt and have an emergency fund, contribute 5-15% of your income every month to a tax-favored retirement account. 
  • Buy and hold index funds that have been open for at least ten years, with returns of at least 8% (ideally over 12%) over the life of the fund, and fees lower than 1% (ideally much lower). 
  • No crypto, NFTs, single stocks, lottery tickets, 401(k) loans, or early withdrawals. 
  • Don’t change your strategy if the market goes up or down. Just keep swimming. 

And of course, reach out for help if you want to tailor this approach to your individual situation. We can easily figure out where you need to be in a (totally free!) Big Financial Picture session

This post owes a big debt to my beta-readers, Sarah Lyons (enormously talented professional editrix and unapologetic em-dash enthusiast), and Casey Jean Miller (magical herbalist crafting the wonderful products at Jean’s Apothecare and asker of great new-to-investing questions). I am so lucky to call you both friends, and if this post is at all confusing, the fault lies with me!

It also owes something to Dave Ramsey’s investing guidance. We started our financial journey listening to his advice back in 2013, and although we don’t align with him on many things these days, his baby steps worked for us. We didn’t invent personal finance — we’re just trying to create a safe, welcoming, compassionate, and shame-free space for you to learn about it.

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