Enough will all the crap, nobody wants to be drowned with information on finance right? What is the bare minimum that needs to be done to have a solid nest egg for retirement? In my opinion there is one thing that anyone can do that will provide enough money for the average person to retire at a normal speed.
Will you have 10s of millions of dollars? no. Will you be able to fly on private jets and spend thousands of dollars at the club? no. But you will be able to live a comfortable life, have your home paid off, and be able to occasionally indulge in travel and nice things.
If you have your priorities set, and you know exactly what you want from your retirement this method can work for anyone. The minimum you need to do to retire is something as simple as a Roth IRA. Roth means that you invest the money you already paid income tax on, and you WILL NOT pay takes on any of the gains the account makes. Normally if you buy a stock and it increases by let’s say $10 dollars, you will have to pay taxes on that $10. But with a Roth IRA if your money grows $10, you will not pay taxes on that $10 because the government treats the Roth IRA special to encourage people to invest for their retirement. There is also a Traditional IRA which means you don’t pay taxes on your money until you take it out of the account, this is usually not as good for most people, but it’s worth doing research on the differences. IRA means individual retirement account.
Why a Roth IRA? Well, if you are investing in your 20s, these tax benefits will compound significantly by the time you are in your 60s. Another benefit is that you don’t need a job to have a Roth IRA, meaning you don’t need to rely on your company to provide a 401k because a Roth IRA can be done by anybody over the age of 18. Something I find nice about an IRA is that there is a MAXIMUM amount of money you can deposit each year. This gives you a specific target each year to aim for. At the moment that amount is $6000.
Once you reach that $6000 you are no longer able to invest more money for that year. This means if an IRA is all the investing you want to do for retirement, once you hit that goal the rest of your money can be used to spend or save on other things not necessarly related to retirement.
All you will need to do is max out this account each year. That is $500 per month. If you don’t currently have your finances settled, or if you are not making very much money you may not be able to max this out when you first start. But if you want to retire with a good sum of money, maxing this account is what you will need to do.
If you start investing $6000 every year in this Roth IRA from the age of 18 to the age of 65, you will have over 6 MILLION dollars in your account at a 10% rate of return. If you start after college around the age of 22, that will bring it down to about 4 MILLION dollars. If you again wait until you are 30 years old, you will only have about 2 MILLION dollars to your name. You can see why it’s important to NOT WAIT to start investing for retirement.
You can use this website to find out how much money you will need for retirement or calculate how much you will have when you retire based on your age and how much you are saving.
Slow and steady is one of the only ways to save a large amount of money unless you create a million-dollar business. If you are working the same job for 40 years and never start saving, you will not magically have a million dollars in your bank account. But, if you save every single year a reletively small amount of money nearly everyone has the ability to be worth at least ONE million dollars by their 60s if they start in their 20s.
If you start at the age of 20 years old, you only need to save about $80 dollars per month to achieve millionaire status at the age of 67 with a 10% rate of return. If you bump that to $100 per month, that instantly boosts your money to about $1.3 Million. So an extra $20 per month, basically a night to Applebees, is enough to boost your retirement account by $300,000 dollars.
You really should play around with the website I linked above to calculate your own numbers to see how much you need to save based on your own age and the age you want to retire.
If you are over the age of 40, this account alone is unlikely to make you have over 1 million dollars. You will probably need to save more than $6000 dollars per year. This is a good place to start investing the first $6000 dollars every year, because of the tax advantages.
If you have a job that has a 401k and they provide a company match, you should do that first. Company matches are one of the most powerful ways to save because you are instantly doubling your money some of your money. 401ks and IRAs have a lot of similarities, it’s worth looking into both. Like I said earlier the small cap of $6000 on the IRA and being able to invest in it even if your company does not have a 401k are some of the reasons I prefer an IRA personally.
There are hundreds of ways to invest your money, this is just one of those ways. This is probably not the absolute best way to invest, and I am not recommending that you blindly do this for the rest of your life. I personally max out my Roth IRA each year and will continue to do so but there are other options, so it is best to do some more research.
The Roth IRA is powerful due to the tax benefits as well as the simplicity. You can automate your investments as well. Many companies provide a ‘Target Date’ retirement fund. You will basically choose what year you turn 67 (the current retirement age) and stick with that account and they will automatically make it less risky as you age. In your 20’s this fund will automatically invest more in stocks, as you get older they will take less % out of stocks and put it in things like bonds to reduce your risk.
For example the Vanguard fund for people retiring in 2065 is called:
“Vanguard Target Retirement 2065 Fund”
If you have any questions feel free to email me or put it in the comments.
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