How to Plan for Retirement
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Everyone will eventually become unable to work at some point in life, whether it is 65 years, 75 years, or 85 years of age. Most people want to retire early, especially me, which is why you would want to plan it as early as possible. By the time I entered the University (at age 18) I started learning to invest through mostly Investopedia.com and opened my first brokerage account at Zecco.com when they offered 30 free trades a month then. However, I plan to close it as they no longer offer free trades.
In my last year at the University I opened my Roth IRA at Etrade and started investing for my retirement. I’m currently switching my Roth IRA to Vanguard though. Then when I launched my career I started contributing to my 401k to the maximum with a 50% match from my company. Already off the bat, I will have 2 sources of passive income for my retirement, which is the minimum you should have once you stop working. Also, you should count on Social Security if you are retiring in the year 2045 as they will exhaust their funds by then according to researchers.
Recently I have just opened a non-retirement account at Fidelity for big plans such as for my wedding, buying a house, big vacations, etc. Fidelity and Vanguard are full serviced brokerages as they offer not just stocks, but also corporate & government bonds, CDs, ETFs, Mutual Funds, Index Funds, Options, and even precious metals such as gold, silver, platinum, & palladium. I would highly recommend these 2 brokerages to start off investing. Below I will offer an easy 5-step to plan for your retirement.
1. Live below your means, or better yet, try to live with only 50% of your income. This means if you make 100k a year, then try to live with only 50k. This may seem hard and you think you’re going to suffer when you first read this, but it’s quite possible and you won’t be living any worse than you are now, if not, better. Some of the things you should eliminate right off the bat are: smoking, drinking so often, and gambling. These things are not good for you and by eliminating them your life won’t be worse, but much better. However, you can’t just break a habit easily; you’d have to replace it with something else such as: exercising, play a sport or instrument, reading, etc. Then you can cut costs on a lot of things such as your internet, cable, insurance, rent or mortgage, heating or A/C, etc. by finding better deals or better systems and reducing the costs on these things won’t lower your standard of living at all. And last, there are things you can do less of such as: shopping, eating out, driving, etc. which will help you save and discipline yourself. You should always ask yourself if you really need this before you purchase something.
2. Eliminate all debt with a higher interest rate than your low end of your ROI (return on investment) and stop accumulating any more debt. For simplicity’s sake, start paying back your loans (credit cards, mortgages, auto loans, personal loans, LOC) if their APR (Annual Percentage Rate) is higher than 6% and stop incurring those debts.
3. Open high yield bank accounts to put your emergency funds (3-12 months) and living expenses in. This means open a bank checking, savings, CDs, and/or money market accounts which offer high interest rate. You can do this by first checking your local credit union at www.creditunionsonline.com, use an online savings account such www.smartypig.com, www.evantagebank.com, or www.discover.com, or www.ing.com or www.ally.com. All the money you need to meet your living expenses should be in one account (checking account) and your emergency funds (savings or money market account) from 3-12 months in another account. You can also create a 3rd account (money market account or CDs) for vacations/travel funds, but I highly recommend using a brokerage for that instead of a bank because you can accumulate wealth faster investing in mutual funds/index funds than you would in a bank money market account or CDs.
4. Start maximizing your 401k ($16,500/year max in 2011) contributions and your Roth IRA ($5000/year for under 50 and $6000/year for 50 and over) contributions. You should work for a company which offers a 401k and matches your contribution and if your company doesn’t offer it you can open a 403b or traditional IRA. Also, you should find a company which has a pension plan, especially one where you don’t have to contribute anything to it. Invest in mostly index funds (which are passively managed mutual funds, which are says to do better than actively managed funds by funds managers) and ETFs (Exchange Traded Funds) where the expense ratios are low and the returns are moderate (don’t try to be greedy with a high return). You should do this as early as you can such as in your 20’s and make sure you do it before reaching the age of 30. If you do it yearly, I can guarantee you that you will retire within 30 years and be able to live comfortably for the rest of your life.
5. Get yourself educated about building passive incomes, aka, investing in income producing assets such as: bonds, stocks, and real estate or REITs (Real Estate Investment Trusts) to supplement your active income (your job, career, or running your own business). This is good income for when you are laid off or quit to find a new job. You can get started on this by learning about Warren Buffett (known as one of the world’s most successful investors). His investing philosophy is long-term and is very easy to follow. The way he analyzes/values securities (bonds, stocks, REITs) are difficult to copy though. However, he believes everyone should have their own style of analyzing/valuing securities. By learning to invest in individual bonds, stocks, and real estate/REITs you can increase your income by 10% to 20% depending on how much effort you put into learning and the percentage is compounded yearly too. You can do this by opening a full brokerage firm such as Fidelity or Vanguard OR you can use a discount brokerage such as Just2Trade, MBTrading, or OptionsHouse.
